Heterochromatin protein 1 (HP1) is a conserved component of the highly compact chromatin of higher eukaryotic centromeres and telomeres. Cytogenetic experiments in Drosophila have shown that HP1 localization into this chromatin is perturbed in mutants for the origin recognition complex (ORC) 2 subunit. ORC has a multisubunit DNA-binding activity that binds origins of DNA replication where it is required for origin firing. The DNA-binding activity of ORC is also used in the recruitment of the Sir1 protein to silence nucleation sites flanking silent copies of the mating-type genes in Saccharomyces cerevisiae. A fraction of HP1 in the maternally loaded cytoplasm of the early Drosophila embryo is associated with a multiprotein complex containing Drosophila melanogaster ORC subunits. This complex appears to be poised to function in heterochromatin assembly later in embryonic development. Here we report the identification of a novel component of this complex, the HP1/ORC-associated protein. This protein contains similarity to DNA sequence-specific HMG proteins and is shown to bind specific satellite sequences and the telomere-associated sequence in vitro. The protein is shown to have heterochromatic localization in both diploid interphase and mitotic chromosomes and polytene chromosomes. Moreover, the gene encoding HP1/ORC-associated protein was found to display reciprocal dose-dependent variegation modifier phenotypes, similar to those for mutants in HP1 and the ORC 2 subunit.