The PAX3-FKHR fusion protein of human alveolar rhabdomyosarcoma consists of the DNA-binding domains of PAX3 and the transcriptional activation domain of FKHR. It induces oncogenic transformation in cultures of chicken embryo fibroblasts (CEFs). PAX3-FKHR-transformed CEFs have been kept in continuous culture for more than 1 year; when quiescent, portions of the cultures differentiate into several distinct cell types. Deletion analysis suggests that both DNA binding and transcriptional activation are required for the induction of the PAX3-FKHR-transformed cellular phenotype. Mutant PAX3-FKHR proteins with reduced DNA binding or transactivation induce altered cellular morphologies and growth behavior distinct from that of CEFs expressing wild-type PAX3-FKHR. Mutant proteins that completely lack DNA binding or transactivation potential fail to transform.