Although the majority of genomic binding sites for the insulator protein CTCF are constitutively occupied, a subset show variably occupancy. Such variable sites provide an opportunity to assess context-specific CTCF functions in gene regulation. Here we have identified a variably occupied CTCF site in the Drosophila Ultrabithorax (Ubx) gene. This site is occupied in tissues where Ubx is active (third thoracic leg imaginal disc) but is not bound in tissues where the Ubx gene is repressed (first thoracic leg imaginal disc). Using chromatin conformation capture we show that this site preferentially interacts with the Ubx promoter region in the active state. The site lies close to Ubx enhancer elements and is also close to the locations of several gypsy transposon insertions that disrupt Ubx expression, leading to the bx mutant phenotype. Gypsy insertions carry the Su(Hw)-dependent gypsy insulator and were found to affect both CTCF binding at the variable site and the chromatin topology. This suggests that insertion of the gypsy insulator in this region interferes with CTCF function and supports a model for the normal function of the variable CTCF site as a chromatin loop facilitator, promoting interaction between Ubx enhancers and the Ubx transcription start site.