Other ; Background Heterochromatin protein 1 (HP1) family proteins have a well-characterized role in heterochromatin packaging and gene regulation. Their function in organismal development, however, is less well understood. Here we used genome-wide expression profiling to assess novel functions of the Caenorhabditis elegans HP1 homolog HPL-2 at specific developmental stages. Results We show that HPL-2 regulates the expression of germline genes, extracellular matrix components and genes involved in lipid metabolism. Comparison of our expression data with HPL-2 ChIP-on-chip profiles reveals that a significant number of genes up- and down-regulated in the absence of HPL-2 are bound by HPL-2. Germline genes are specifically up-regulated in hpl-2 mutants, consistent with the function of HPL-2 as a repressor of ectopic germ cell fate. In addition, microarray results and phenotypic analysis suggest that HPL-2 regulates the dauer developmental decision, a striking example of phenotypic plasticity in which environmental conditions determine developmental fate. HPL-2 acts in dauer at least partly through modulation of daf-2/IIS and TGF-β signaling pathways, major determinants of the dauer program. hpl-2 mutants also show increased longevity and altered lipid metabolism, hallmarks of the long-lived, stress resistant dauers. Conclusions Our results suggest that the worm HP1 homologue HPL-2 may coordinately regulate dauer diapause, longevity and lipid metabolism, three processes dependent on developmental input and environmental conditions. Our findings are of general interest as a paradigm of how chromatin factors can both stabilize development by buffering environmental variation, and guide the organism through remodeling events that require plasticity of cell fate regulation.