UHRF1 is a multidomain protein crucially linking histone H3 modification states and DNA methylation. While the interaction properties of its specific domains are well characterized, little is known about the regulation of these functionalities. We show that UHRF1 exists in distinct active states, binding either unmodified H3 or the H3 lysine 9 trimethylation (H3K9me3) modification. A polybasic region (PBR) in the C terminus blocks interaction of a tandem tudor domain (TTD) with H3K9me3 by occupying an essential peptide-binding groove. In this state the plant homeodomain (PHD) mediates interaction with the extreme N terminus of the unmodified H3 tail. Binding of the phosphatidylinositol phosphate PI5P to the PBR of UHRF1 results in a conformational rearrangement of the domains, allowing the TTD to bind H3K9me3. Our results define an allosteric mechanism controlling heterochromatin association of an essential regulatory protein of epigenetic states and identify a functional role for enigmatic nuclear phosphatidylinositol phosphates.