The histone deacetylase HDAC3 is associated with the NCoR/SMRT co-repressor complex, and its canonical function is in transcriptional repression, but it can also activate transcription. Here, we show that the repressor and activator functions of HDAC3 can be genetically separated in Drosophila. A lysine substitution in the N terminus (K26A) disrupts its catalytic activity and activator function, whereas a combination of substitutions (HEBI) abrogating the interaction with SMRTER enhances repressor activity beyond wild type in the early embryo. We conclude that the crucial functions of HDAC3 in embryo development involve catalytic-dependent gene activation and non-enzymatic repression by several mechanisms, including tethering of loci to the nuclear periphery.