Groucho-related (Gro/TLE/Grg) corepressors meditate embryonic segmentation, dorsal-ventral patterning, neurogenesis, and Notch and Wnt signaling. Although Gro/TLE/Grgs disrupt activator complexes and recruit histone deacetylases (HDAC), activator complexes can be disrupted in various ways, HDAC recruitment does not account for full corepressor activity, and a direct role for Gro/TLE/Grg binding and altering chromatin structure has not been explored. Using diverse chromatin substrates in vitro, we show that Grg3 creates higher-order, condensed complexes of polynucleosome arrays. Surprisingly, such complexes are in an open, exposed configuration. We find that chromatin binding enables Grg3 recruitment by a transcription factor and the creation of a closed, poorly accessible domain spanning three to four nucleosomes. Targeted recruitment of Grg3 blankets a similar-sized region in vivo, impairing activator recruitment and repressing transcription. These activities of a Groucho protein represent a newly discovered mechanism which differs from that of other classes of corepressors.