The Saccharomyces cerevisiae Ku heterodimer comprising Yku70p and Yku80p is involved in telomere maintenance and DNA repair by the pathway of non-homologous end joining. It is also a key regulator of transcriptional silencing of genes placed in close proximity to telomeres. Here, we describe the identification of separation-of-function mutants of Yku80p that exhibit defects in silencing but not DNA repair and show that these mutations map to an evolutionarily conserved domain within Yku80p. Furthermore, we reveal that Yku80p interacts with the silent information regulator protein Sir4p and that this interaction is mediated by the N-terminal 200 amino acid residues of Sir4p. Notably, this interaction also requires the region of Yku80p that contains the sites of the silencing defective mutations. Finally, we show that these mutations impair the Yku80p-Sir4p interaction and recruitment of Sir3p to telomeric regions in vivo. Taken together with other data, these findings indicate that the Yku80p-Sir4p interaction plays a vital role in the assembly of telomeric heterochromatin.