Silencing of exogenous DNA can make transgene expression very inefficient. Genetic screens in the model alga Chlamydomonas have demonstrated that transgene silencing can be overcome by mutations in unknown gene(s), thus producing algal strains that stably express foreign genes to high levels. Here, we show that the silencing mechanism specifically acts on transgenic DNA. Once a permissive chromatin structure has assembled, transgene expression can persist even in the absence of mutations disrupting the silencing pathway. We have identified the gene conferring the silencing and show it to encode a sirtuin-type histone deacetylase. Loss of gene function does not appreciably affect endogenous gene expression. Our data suggest that transgenic DNA is recognized and then quickly inactivated by the assembly of a repressive chromatin structure composed of deacetylated histones. We propose that this mechanism may have evolved to provide protection from potentially harmful types of environmental DNA.