In fission yeast, siRNA is generated from pericentromeric noncoding RNA by the RNAi machinery. siRNA synthesis and heterochromatin formation are interdependent, forming a self-reinforcing loop on chromatin. In this system, siRNA is amplified by the RNA-dependent RNA polymerase complex (RDRC) and the endoribonuclease Dcr1, which synthesizes dsRNA and processes the dsRNA, respectively. The amplification is essential for stable heterochromatin formation. Here, a novel gene, dsh1(+) (defect of the gene silencing at centromeric heterochromatin), is identified as an essential component of RNAi-directed heterochromatin assembly. Loss of dsh1(+) abolishes normal RNAi function and heterochromatic gene silencing at pericentromeres. Dsh1 interacts with Dcr1 and RDRC and couples the reactions of both proteins to the effective production of siRNA in vivo. Dsh1 binds to heterochromatin in the absence of RDRC, while RDRC requires Dsh1 for its chromatin-binding activity, suggesting that Dsh1 recruits RDRC to chromatin. Immunofluorescence analysis shows that Dsh1 forms foci at the nuclear periphery, and some Dsh1 foci colocalize with Dcr1 and RDRC. Dsh1 is required for the colocalization of Dcr1 and RDRC. Moreover, loss of the nuclear periphery localization of Dsh1 abolishes Dsh1 function. Taken together, these results suggest that Dsh1 assembles the RNAi machinery on heterochromatin and forms a perinuclear compartment for amplification of heterochromatic siRNA.