The Caenorhabditis elegans dosage compensation complex (DCC) equalizes X-chromosome gene dosage between XO males and XX hermaphrodites by two-fold repression of X-linked gene expression in hermaphrodites. The DCC localizes to the X chromosomes in hermaphrodites but not in males, and some subunits form a complex homologous to condensin. The mechanism by which the DCC downregulates gene expression remains unclear. Here we show that the DCC controls the methylation state of lysine 20 of histone H4, leading to higher H4K20me1 and lower H4K20me3 levels on the X chromosomes of XX hermaphrodites relative to autosomes. We identify the PR-SET7 ortholog SET-1 and the Suv4-20 ortholog SET-4 as the major histone methyltransferases for monomethylation and di/trimethylation of H4K20, respectively, and provide evidence that X-chromosome enrichment of H4K20me1 involves inhibition of SET-4 activity on the X. RNAi knockdown of set-1 results in synthetic lethality with dosage compensation mutants and upregulation of X-linked gene expression, supporting a model whereby H4K20me1 functions with the condensin-like C. elegans DCC to repress transcription of X-linked genes. H4K20me1 is important for mitotic chromosome condensation in mammals, suggesting that increased H4K20me1 on the X may restrict access of the transcription machinery to X-linked genes via chromatin compaction.