Eukaryotic chromatin is organized into compartments for gene expression regulation, but the underlying mechanisms remain unclear. Here, we demonstrate that multivalent H3K27me3 and its reader, CBX7-PRC1 complex, regulate facultative heterochromatin via a phase separation mechanism, similar to constitutive heterochromatin1. Facultative and constitutive heterochromatin represent distinct, coexisting condensates in nuclei.In vitro,H3K27me3- and H3K9me3-marked nucleosomal arrays and their reader complexes can phase separate into immiscible condensates that are analogous to the relationship between facultative and constitutive heterochromatinin vivo. Moreover, overexpression of CBX7-PRC1 causes aberrant chromatin compartmentalizationin vivoas demonstrated by H3K9me3 CUT&Tag and up-regulation of genes related to cancer such as acute myeloblastic leukemia (AML). CBX7 inhibitor effectively inhibits cancer cell proliferation possibly through phase separation-mediated compartment reorganization. Our data demonstrated how the specificity of compartmentalization is achieved based on the formation of immiscible phase-separated condensates, and offer novel epigenetic mechanistic insights into tumor development.