Developmental gene expression results from the orchestrated interplay between genetic and epigenetic mechanisms. Here, we describe upSET, a transcriptional regulator encoding a SET domain-containing protein recruited to active and inducible genes in Drosophila. However, unlike other Drosophila SET proteins associated with gene transcription, UpSET is part of an Rpd3/Sin3-containing complex that restricts chromatin accessibility and histone acetylation to promoter regions. In the absence of UpSET, active chromatin marks and chromatin accessibility increase and spread to genic and flanking regions due to destabilization of the histone deacetylase complex. Consistent with this, transcriptional noise increases, as manifest by activation of repetitive elements and off-target genes. Interestingly, upSET mutant flies are female sterile due to upregulation of key components of Notch signaling during oogenesis. Thus UpSET defines a class of metazoan transcriptional regulators required to fine tune transcription by preventing the spread of active chromatin.