A new class of dispersed repetitive DNA designated as vivi-sequence (VS) has been identified in Drosophila. It is relatively AT rich and is transcribed. The VS transcription is developmentally regulated and generates multiple transcripts. A hybrid transcript, designated fl-cDNA, has been identified in which a small segment of the VS is fused to the 5' end of an unrelated structural gene transcript coding; for the heterochromatin protein HP1. The VS has recombination signal sequences (RSS) characteristic of vertebrate immunoglobulin genes. Such sequences are also present in the HP1 DNA. In both cases the recombination signal sequences are found close to the junction between HP1 and the VS in fl-cDNA. There is additional sequence identity both 5′ and 3′ of the junction between HP1 and the VS in fl-cDNA. We propose that (a) the HP1-VS composite transcript represented by the fl-cDNA may be the product of recombination between the two sequences, (b) that the process is mediated by the RSS and/or the DNA downstream of the junction between HP1 and the VS and (c) that the recombination event may lead to the inactivation of the HP1 gene in a cell and tissue specific manner.