The temporal and spatial regulation of gene expression in mammalian development is linked to the establishment of functional chromatin domains. Here, we report that tissue-specific transcription of a retrotransposon repeat in the murine growth hormone locus is required for gene activation. This repeat serves as a boundary to block the influence of repressive chromatin modifications. The repeat element is able to generate short, overlapping Pol II–and Pol III–driven transcripts, both of which are necessary and sufficient to enable a restructuring of the regulated locus into nuclear compartments. These data suggest that transcription of interspersed repetitive sequences may represent a developmental strategy for the establishment of functionally distinct domains within the mammalian genome to control gene activation.