HMG-D is an abundant chromosomal protein associated with condensed chromatin during the first nuclear cleavage cycles of the developing Drosophila embryo. We previously suggested that HMG-D might substitute for the linker histone H1 in the preblastoderm embryo and that this substitution might result in the characteristic less compacted chromatin. We have now studied the association of HMG-D with chromatin using a cell-free system for chromatin reconstitution derived from Drosophila embryos. Association of HMG-D with chromatin, like that of histone H1, increases the nucleosome spacing indicative of binding to the linker DNA between nucleosomes. HMG-D interacts with DNA during the early phases of nucleosome assembly but is gradually displaced as chromatin matures. By contrast, purified chromatin can be loaded with stoichiometric amounts of HMG-D, and this can be displaced upon addition of histone H1. A direct physical interaction between HMG-D and histone H1 was observed in a Far Western analysis. The competitive nature of this interaction is reminiscent of the apparent replacement of HMG-D by H1 during mid-blastula transition. These data are consistent with the hypothesis that HMG-D functions as a specialized linker protein prior to appearance of histone H1.