The gypsy retrotransposon of Drosophila melanogaster causes mutations that show temporal and tissue-specific phenotypes. These mutant phenotypes can be reversed by mutations in su(Hw), a gene that also regulates the transcription of the gypsy element. Gypsy encodes a full-length 7.0-kb RNA that is expressed in the salivary gland precursors and fat body of the embryo, imaginal discs and fat body of larvae, and fat body and ovaries of adult females. The su(Hw)-binding region inserted upstream of the promoter of a lacZ reporter gene can induce beta-galactosidase expression in a subset of the embryonic and larval tissues where gypsy is normally transcribed. This expression is dependent on the presence of a functional su(Hw) product, suggesting that this protein is a positive activator of gypsy transcription. Flies transformed with a construct in which the 5' LTR and leader sequences of gypsy are fused to lacZ show beta-galactosidase expression in all tissues where gypsy is normally expressed, indicating that sequences other than the su(Hw)-binding site are required for proper spatial and temporal expression of gypsy. Mutations in the zinc fingers of su(Hw) affect its ability to bind DNA and to induce transcription of the lacZ reporter gene. Two other structural domains of su(Hw) also play an important role in transcriptional regulation of gypsy. Deletion of the amino-terminal acidic domain results in the loss of lacZ expression in larval fat body and adult ovaries, whereas mutations in the leucine zipper region result in an increase of lacZ expression in larval fat body and a decrease in adult ovaries. These effects might be the result of interactions of su(Hw) with activator and repressor proteins through the acidic and leucine zipper domains to produce the final pattern of tissue-specific expression of gypsy.