Transposable elements (TEs) are widespread genomic parasites, and their evolution has remained a critical question in evolutionary genomics. Here, we study the relatively unexplored epigenetic impacts of TEs and provide the first genome-wide quantification of such effects in D. melanogaster and D. simulans. Surprisingly, the spread of repressive epigenetic marks (histone H3K9me2) to nearby DNA occurs at >50% of euchromatic TEs, and can extend up to 20 kb. This results in differential epigenetic states of genic alleles and, in turn, selection against TEs. Interestingly, the lower TE content in D. simulans compared to D. melanogaster correlates with stronger epigenetic effects of TEs and higher levels of host genetic factors known to promote epigenetic silencing. Our study demonstrates that the epigenetic effects of euchromatic TEs, and host genetic factors modulating such effects, play a critical role in the evolution of TEs both within and between species.DOI: http://dx.doi.org/10.7554/eLife.25762.001

Tandemly-repeated DNAs, or satellites, are enriched in heterochromatic regions of eukaryotic genomes and contribute to nuclear structure and function. Some satellites are transcribed, but we lack direct evidence that specific satellite RNAs are required for normal organismal functions. Here, we show satellite RNAs derived from AAGAG tandem repeats are transcribed in many cells throughout Drosophila melanogaster development, enriched in neurons and testes, often localized within heterochromatic regions, and important for viability. Strikingly, we find AAGAG transcripts are necessary for male fertility, and that AAGAG RNA depletion results in defective histone-protamine exchange, sperm maturation and chromatin organization. Since these events happen late in spermatogenesis when the transcripts are not detected, we speculate that AAGAG RNA in primary spermatocytes ‘primes’ post-meiosis steps for sperm maturation. In addition to demonstrating essential functions for AAGAG RNAs, comparisons between closely related Drosophila species suggest that satellites and their transcription evolve quickly to generate new functions.