In the fission yeast Schizosaccharomyces pombe, the RNA-Induced Transcriptional Silencing (RITS) complex has been proposed to target the chromosome via siRNA-dependent base-pairing interactions to initiate heterochromatin formation. Here we show that tethering of the RITS subunit, Tas3, to the RNA transcript of the normally active ura4+ gene silences ura4+ expression. This silencing depends on a functional RNAi pathway, requires the heterochromatin proteins, Swi6/HP1, Clr4/Suv39h, and Sir2, and is accompanied by the generation of ura4+ siRNAs, histone H3-lysine 9 methylation, and Swi6 binding. Furthermore, the ability of the newly generated ura4+ siRNAs to silence a second ura4+ allele in trans is strongly inhibited by the conserved siRNA nuclease, Eri1. Surprisingly, silencing of tethered ura4+, or ura4+ inserted within centromeric heterochromatin, or some of the endogenous centromeric repeat promoters, is not associated with changes in RNA polymerase II occupancy. These findings support a model in which targeting of nascent transcripts by RITS mediates chromatin modifications and suggest that cotranscriptional processing events play a primary role in the silencing mechanism.