Heterochromatin at the pericentromeric repeats in fission yeast is assembled and spread by an RNAi-dependent mechanism, which is coupled with the transcription of non-coding RNA from the repeats by RNA polymerase II. In addition, Rrp6, a component of the nuclear exosome, also contributes to heterochromatin assembly and is coupled with non-coding RNA transcription. The multi-subunit complex Mediator, which directs initiation of RNA polymerase II-dependent transcription, has recently been suggested to function after initiation in processes such as elongation of transcription and splicing. However, the role of Mediator in the regulation of chromatin structure is not well understood. We investigated the role of Mediator in pericentromeric heterochromatin formation and found that deletion of specific subunits of the head domain of Mediator compromised heterochromatin structure. The Mediator head domain was required for Rrp6-dependent heterochromatin nucleation at the pericentromere and for RNAi-dependent spreading of heterochromatin into the neighboring region. In the latter process, Mediator appeared to contribute to efficient processing of siRNA from transcribed non-coding RNA, which was required for efficient spreading of heterochromatin. Furthermore, the head domain directed efficient transcription in heterochromatin. These results reveal a pivotal role for Mediator in multiple steps of transcription-coupled formation of pericentromeric heterochromatin. This observation further extends the role of Mediator to co-transcriptional chromatin regulation. 