Epigenetically silent transposons and repeats constitute a substantial proportion of eukaryotic genomes, but their impact on cellular gene function remains largely unexplored. In Arabidopsis, transposons are silenced by DNA methylation, and this methylation is often abolished by mutations in a chromatin-remodeling gene DDM1 (DECREASE IN DNA METHYLATION 1). The ddm1 mutation induces various types of developmental abnormalities through de-repression of transposons and repeats. Here, we report a novel mechanism for a ddm1-induced syndrome, called bonsai (bns). We identified the gene responsible for the bns phenotypes by genetic linkage analysis and subsequent transcriptional analysis. The bns phenotypes are due to silencing of a putative Anaphase-Promoting Complex (APC) 13 gene. The BNS gene silencing was associated with DNA hypermethylation, which is in contrast to the ddm1-induced hypomethylation in the other genomic regions. This paradoxical BNS hypermethylation was reproducibly induced during self-pollination of the ddm1 mutant, and it was mediated by a long interspersed nuclear element (LINE) retrotransposon flanking the BNS gene. We discuss possible molecular mechanisms and the evolutionary implications of transposon-mediated epigenetic changes in the BNS locus.