Telomeres are important contributors to genome stability, as they prevent linear chromosome end degradation and contribute to the avoidance of telomeric fusions. An important component of the telomeres is the heterochromatin protein 1a (HP1a). Mutations in Su(var)205, the gene encoding HP1a in Drosophila, result in telomeric fusions, retrotransposon regulation loss and larger telomeres, leading to chromosome instability. Previously, it was found that several proteins physically interact with HP1a, including dXNP and dAdd1 (orthologues to the mammalian ATRX gene). In this study, we found that mutations in the genes encoding the dXNP and dAdd1 proteins affect chromosome stability, causing chromosomal aberrations, including telomeric defects, similar to those observed in Su(var)205 mutants. In somatic cells, we observed that dXNP and dAdd1 participate in the silencing of the telomeric HTT array of retrotransposons, preventing anomalous retrotransposon transcription and integration. Furthermore, the lack of dAdd1 results in the loss of HP1a from the telomeric regions without affecting other chromosomal HP1a binding sites; mutations in dxnp also affected HP1a localization but not at all telomeres, suggesting a specialized role for dAdd1 and dXNP proteins in locating HP1a at the tips of the chromosomes. These results place dAdd1 as an essential regulator of HP1a localization and function in the telomere heterochromatic domain.