Methylation of histone H3 at lysine 9 by SUV39H1 and subsequent recruitment of the heterochromatin protein HP1 has recently been linked to gene silencing. In addition to lysine 9, histone H3 methylation also occurs at lysines 4, 27, and 36. Here, we report the purification, molecular identification, and functional characterization of an H3-lysine 4-specific methyltransferase (H3-K4-HMTase), SET7. We demonstrate that SET7 methylates H3-K4 in vitro and in vivo. In addition, we found that methylation of H3-K4 and H3-K9 inhibit each other. Furthermore, H3-K4 and H3-K9 methylation by SET7 and SUV39H1, respectively, have differential effects on subsequent histone acetylation by p300. Thus, our study provides a molecular explanation to the differential effects of H3-K4 and H3-K9 methylation on transcription.