Cotranscriptional RNA processing and surveillance factors mediate heterochromatin formation in diverse eukaryotes. In fission yeast, RNAi machinery and RNA elimination factors including the Mtl1-Red1 core and the exosome are involved in facultative heterochromatin assembly; however, the exact mechanisms remain unclear. Here we show that RNA elimination factors cooperate with the conserved exoribonuclease Dhp1/Rat1/Xrn2, which couples pre-mRNA 3'-end processing to transcription termination, to promote premature termination and facultative heterochromatin formation at meiotic genes. We also find that Dhp1 is critical for RNAi-mediated heterochromatin assembly at retroelements and regulated gene loci and facilitates the formation of constitutive heterochromatin at centromeric and mating-type loci. Remarkably, our results reveal that Dhp1 interacts with the Clr4/Suv39h methyltransferase complex and acts directly to nucleate heterochromatin. Our work uncovers a previously unidentified role for 3'-end processing and transcription termination machinery in gene silencing through premature termination and suggests that noncanonical transcription termination by Dhp1 and RNA elimination factors is linked to heterochromatin assembly. These findings have important implications for understanding silencing mechanisms targeting genes and repeat elements in higher eukaryotes. 