RNA interference (RNAi) is a conserved mechanism in which small interfering RNAs (siRNAs) guide the degradation of cognate RNAs, but also promote heterochromatin assembly at repetitive DNA elements such as centromeric repeats. However, the full extent of RNAi functions and its endogenous targets have not been explored. Here we show that, in the fission yeast Schizosaccharomyces pombe, RNAi and heterochromatin factors cooperate to silence diverse loci, including sexual differentiation genes, genes encoding transmembrane proteins, and retrotransposons that are also targeted by the exosome RNA degradation machinery. In the absence of the exosome, transcripts are processed preferentially by the RNAi machinery, revealing siRNA clusters and a corresponding increase in heterochromatin modifications across large domains containing genes and retrotransposons. We show that the generation of siRNAs and heterochromatin assembly by RNAi is triggered by a mechanism involving the canonical poly(A) polymerase Pla1 and an associated RNA surveillance factor Red1, which also activate the exosome. Notably, siRNA production and heterochromatin modifications at these target loci are regulated by environmental growth conditions, and by developmental signals that induce gene expression during sexual differentiation. Our analyses uncover an interaction between RNAi and the exosome that is conserved in Drosophila, and show that differentiation signals modulate RNAi silencing to regulate developmental genes.