In the genomes of many eukaryotes, including mammals, highly repetitive DNA is normally associated with histone H3 lysine-9 di-/trimethylation (H3K9me2/3) and C5-cytosine methylation (5mC) in the context of heterochromatin. In the fungus Neurospora crassa, H3K9me3 and 5mC are catalyzed, respectively, by a conserved SUV39 histone methylase DIM-5 and a DNMT1-like cytosine methylase DIM-2. Here we show that DIM-2 can also mediate cytosine-to-thymine mutation of repetitive DNA during the pre-meiotic process known as Repeat-Induced Point mutation (RIP) in N. crassa. We further show that DIM-2-dependent RIP requires DIM-5, HP1, and other heterochromatin factors, implying the involvement of a repeat-induced heterochromatin-related process. Our previous findings suggest that the mechanism of homologous repeat recognition for RIP involves direct pairwise interactions between co-aligned double-stranded (ds) DNA segments. Our current findings therefore raise the possibility that such pairing interactions may occur not only in pre-meiotic but also in vegetative cells, where they may direct heterochromatin assembly on repetitive DNA. In accord with this possibility, we find that, in vegetative cells of N. crassa, our model repeat array comprising only four 674-bp sequence copies can trigger a low level of DIM-5-dependent 5meC. We thus propose that homologous dsDNA/dsDNA interactions between a small number of repeat copies can nucleate a transient state of heterochromatin and that, on longer repeat arrays, such interactions lead to the formation of stable heterochromatin. Since the number of possible pairwise dsDNA/dsDNA interactions will scale non-linearly with the number of repeats, this mechanism provides an attractive way of creating the extended domains of constitutive heterochromatin found in pericentromeric and subtelomeric regions.