Small interfering RNA (siRNA) guides dimethylation of histone H3 lysine-9 (H3K9me2) via the Argonaute and RNA-dependent RNA polymerase complexes, as well as base-pairing with either RNA or DNA. We show that Argonaute requires the conserved aspartate-aspartate-histidine motif for heterochromatic silencing and for ribonuclease H-like cleavage (slicing) of target messages complementary to siRNA. In the fission yeast Schizosaccharomyces pombe, heterochromatic repeats are transcribed by polymerase II. We show that H3K9me2 spreads into silent reporter genes when they are embedded within these transcripts and that spreading requires read-through transcription, as well as slicing by Argonaute. Thus, siRNA guides histone modification by base-pairing interactions with RNA.