Here we show that the cytosine-5 methyltransferase DNMT2 controls retrotransposon silencing in Drosophila somatic cells. In Drosophila, significant DNMT2-dependent DNA methylation occurs during early embryogenesis. Suppression of white gene silencing by Mt2 (Dnmt2) null mutations in variegated P[w(+)] element insertions identified functional targets of DNMT2. The enzyme controls DNA methylation at retrotransposons in early embryos and initiates histone H4K20 trimethylation catalyzed by the SUV4-20 methyltransferase. In somatic cells, loss of DNMT2 eliminates H4K20 trimethylation at retrotransposons and impairs maintenance of retrotransposon silencing. In Dnmt2 and Suv4-20 null genotypes, retrotransposons are strongly overexpressed in somatic but not germline cells, where retrotransposon silencing depends on an RNAi mechanism. DNMT2 also controls integrity of chromosome 2R and 3R telomeres. In Dnmt2 null strains, we found stable loss of the subtelomeric clusters of defective Invader4 elements. Together, these results demonstrate a previously unappreciated role of DNA methylation in retrotransposon silencing and telomere integrity in Drosophila.