RNA interference (RNAi) acts on long double-stranded RNAs (dsRNAs) in a variety of eukaryotes to generate small interfering RNAs that target homologous messenger RNA, resulting in their destruction. This process is widely used to 'knock-down' the expression of genes of interest to explore phenotypes. In plants, fission yeast, ciliates, flies and mammalian cells, short interfering RNAs (siRNAs) also induce DNA or chromatin modifications at the homologous genomic locus, which can result in transcriptional silencing or sequence elimination. siRNAs may direct DNA or chromatin modification by siRNA-DNA interactions at the homologous locus. Alternatively, they may act by interactions between siRNA and nascent transcript. Here we show that in fission yeast (Schizosaccharomyces pombe), chromatin modifications are only directed by RNAi if the homologous DNA sequences are transcribed. Furthermore, transcription by exogenous T7 polymerase is not sufficient. Ago1, a component of the RNAi effector RISC/RITS complex, associates with target transcripts and RNA polymerase II. Truncation of the regulatory carboxy-terminal domain (CTD) of RNA pol II disrupts transcriptional silencing, indicating that, like other RNA processing events, RNAi-directed chromatin modification is coupled to transcription.