Helper-dependent adenovirus (hdAd) vectors have shown great promise as therapeutic gene delivery vehicles in gene therapy applications. However, the level and duration of gene expression from hdAd can differ considerably depending on the nature of the noncoding stuffer DNA contained within the vector. For example, an hdAd containing 22 kb of prokaryotic DNA (hdAd-prok) expresses its transgene 60-fold less efficiently than a similar vector containing eukaryotic DNA (hdAd-euk). Here we have determined the mechanistic basis of this phenomenon. Although neither vector was subjected to CpG methylation and both genomes associated with cellular histones to similar degrees, hdAd-prok chromatin was actively deacetylated. Insertion of an insulator element between the transgene and the bacterial DNA derepressed hdAd-prok, suggesting that foreign DNA nucleates repressive chromatin structures that spread to the transgene. We found that Sp100B/Sp100HMG and Daxx play a role in repressing transgene expression from hdAd and act independently of PML bodies. Thus, we have identified nuclear factors involved in recognizing foreign DNA and have determined the mechanism by which associated genes are repressed.