The role of heterochromatin in cell fate specification during development is unclear. We demonstrate that loss of the lysine 9 of histone H3 (H3K9) methyltransferase G9a in the mammary epithelium results in de novo chromatin opening, aberrant formation of the mammary ductal tree, impaired stem cell potential, disrupted intraductal polarity, and loss of tissue function. G9a loss derepresses long terminal repeat (LTR) retroviral sequences (predominantly the ERVK family). Transcriptionally activated endogenous retroviruses generate double-stranded DNA (dsDNA) that triggers an antiviral innate immune response, and knockdown of the cytosolic dsDNA sensor Aim2 in G9a knockout (G9acKO) mammary epithelium rescues mammary ductal invasion. Mammary stem cell transplantation into immunocompromised or G9acKO-conditioned hosts shows partial dependence of the G9acKO mammary morphological defects on the inflammatory milieu of the host mammary fat pad. Thus, altering the chromatin accessibility of retroviral elements disrupts mammary gland development and stem cell activity through both cell-autonomous and non-autonomous mechanisms. Keywords: G9a/GLP; chromatin accessibility; endogenous retroviruses; epigenomics; mammary gland development; pyroptosis; single cell genomics; stem cells.