Modification of many transcription factors including Sp3 and steroidogenic factor 1 with the small ubiquitin-like modifier (SUMO) is associated with transcriptional repression. Here, we show that SUMOylation of transcription factors bound to DNA provokes the establishment of compacted repressive chromatin with characteristics of heterochromatin. Chromatin immunoprecipitation experiments revealed SUMO-dependent recruitment of the chromatin remodeller Mi-2, MBT-domain proteins, heterochromatic protein 1, and the histone methyltransferases SETDB1 and SUV4-20H, concomitant with the establishment of histone modifications associated with repressed genes, including H3K9 and H4K20 trimethylation. These results indicate that SUMOylation has a crucial role in regulating gene expression by initiating chromatin structure changes that render DNA inaccessible to the transcription machinery.