Epigenetic mechanisms clearly play a role in determining stem cell identity, but the details of how they contribute remain undefined. Previously, our lab has shown that hematopoietic stem cell (HSC) differentiation involves a progressive, global accumulation of heterochromatin in the cell nucleus. Our goal is to characterize the mechanisms behind this process by investigating the role of the histone methyltransferase G9a, which promotes heterochromatin formation during HSC differentiation. Treatment of HSCs in vitro with UNC0638, a selective inhibitor of G9a, leads to an accumulation of hematopoietic progenitors. Global gene expression analysis reveals that UNC0638 treated cells have higher expression of genes involved in HSC function, including several transcription factors such as Sox6 and Gata1. Overall these data indicate that heterochromatin formation, mediated in part through G9a-mediated histone methylation, is necessary for the transition of HSCs into more mature cells and identifies global chromatin condensation as an essential regulator of stem cell lineage potential and differentiation.