We did functional characterisation of Drosophila melanogaster linker histone, dH1. In the mutant state for this protein, we observed structural changes in polytene chromosomes chromocenter and nucleoli of mutant larvae. In addition, we performed a microarray analysis in H1 mutant background in order to determine contribution of dH1 to gene expression regulation. We determined effects of dH1 loss in different types of chromatin and we identified groups of differentially expressed (DE) genes, groups in sense of physical clusters of genes and genomic elements rather than groups of functionally related genes. We found that dH1 affects in greater extent expression of heterochromatin genes compared to its effect on euchromatin genes; that dH1 regulates transcription in a regional manner, since the genes physically nearest to the most DE genes tend to be upregulated as well; and that dH1 is negatively regulating expression of transposable elements and members of certain gene families. In addition, we found that dH1 is necessary for preserving genome stability. Among DE transposable elements we detected R1 and R2 retrotransposons, elements that are integrating specifically in rRNA locus. We showed that activation of their transcription is also upregulating expression of aberrant, transposon-inserted, rDNA units of the locus. In this regard we observed an accumulation of extra-chromosomal rDNA circles, increased γ-H2Av content, stop in cell proliferation and activation of apoptosis. Altogether, these results are revealing so far unknown role of histone H1 in preserving genome stability and its effects on cell proliferation.