DNA methylation cooperates with methylation at lysine 9 of histone H3 (H3-K9), a modified histone molecule that is targeted by heterochromatin protein 1, to form a transcriptionally silent chromatin. Methyl CpG-binding protein MBD1 recognizes methylated CpG dinucleotide and recruits H3-K9 methyltransferases such as SETDB1 to genomic regions. Here we show that MBD1-containing chromatin-associated factor (MCAF) 1, also known as the human homologue of murine ATFa-associated modulator (AM), is required for transcriptional repression and heterochromatin formation by MBD1, together with the involvement of SETDB1. Moreover, the amino acid sequence of MCAF1 shows similarity to a number of sequences of the MCAF/AM-related proteins, resulting in the identification of a new member of the protein family, termed MCAF2. Immunoprecipitation and in vitro binding analyses reveal that both MCAF proteins interact with MBD1, SETDB1, and Sp1 via two evolutionarily conserved distinct domains. Furthermore, MCAF1 enhances transcriptional repression by MBD1 together with SETDB1, and exogenous expression of MCAF2 partly compensates for the repressive activity in MCAF1 knockdown HeLa cells. The expression of MBD1 mutant, which lacks interaction with MCAF proteins, perturbs heterochromatin protein 1-enriched heterochromatin formation at the MBD1-containing chromosomal loci. These data suggest that MBD1⅐ MCAF1⅐SETDB1 complex facilitates the formation of heterochromatic domains, emphasizing the role of MCAF/AM family proteins in epigenetic control.DNA and protein modifications create a specific surface to interact with target molecules in chromatin (1-7). Cytosine methylation in the 5Ј-CpG-3Ј dinucleotide sequence is involved in gene repression and formation of transcriptionally inactive chromatin, together with the methyl-CpG binding domain (MBD) 1 proteins (8, 9). To date, five family members have been characterized in mammals: MeCP2, MBD1, MBD2, and MBD3 have been characterized as transcriptional repressors; and MBD4 has been characterized as a thymine DNA glycosylase that removes deamination products at methyl-CpG sites. MBD1 is also involved in base excision repair together with the methyl-purine DNA glycosylase (10). These MBD proteins bind specifically to the methyl-CpG pairs, except for MBD3, which localizes to methylated DNA regions by associating with MBD2. On the other hand, posttranslational modifications of amino termini of core histones are correlated to transcriptional states and recognized by relevant chromatin-associated factors (4, 6, 7, 11). These posttranslational modifications include acetylation, phosphorylation, methylation, and other modifications of the histone molecules. It is known that methylated DNA regions normally coexist with the deacetylation and methylation of lysine 9 of histone H3 (H3-K9) and that heterochromatin protein 1 (HP1) selectively binds methyl H3-K9 to form repressive chromatin (12)(13)(14). Recent studies have revealed that both DNA methylation and H3-K9 methylation share a common pathway to f...