Polycomb repressive complex 2 (PRC2)-mediated histone H3 lysine 27 (H3K27) methylation is vital for Polycomb gene silencing, a classic epigenetic phenomenon that maintains transcriptional silencing throughout cell divisions. We report that PRC2 activity is regulated by the density of its substrate nucleosome arrays. Neighboring nucleosomes activate the PRC2 complex with a fragment of their H3 histones (Ala(31) to Arg(42)). We also identified mutations on PRC2 subunit Su(z)12, which impair its binding and response to the activating peptide and its ability in establishing H3K27 trimethylation levels in vivo. In mouse embryonic stem cells, local chromatin compaction occurs before the formation of trimethylated H3K27 upon transcription cessation of the retinoic acid-regulated gene CYP26a1. We propose that PRC2 can sense the chromatin environment to exert its role in the maintenance of transcriptional states.