Paired box-containing transcription factors play fundamental roles in pattern formation during embryonic development of diverse organisms ranging from Drosophila to mammals. Although mutations to Pax3 and other Pax-family genes in both mice and humans result in numerous tissue-specific morphological defects, little is known about the cellular processes that Pax genes regulate. We show that extopic Pax3 expression in two distinct phenotypically mesenchymal mammalian cell lines induces the formation of multi-layered condensed cell aggregates with epithelial characteristics. For one of these lines, we showed further that Pax3-induced cell aggregation is accompanied by specific morphological changes, including a significant reduction in cell size, altered cell shape and dramatic alterations to both membrane and cytoskeleton architecture. In addition to mediating a phenotypic mesenchymal-to-epithelial transition, Pax3 also establishes the conditions in these cells for a subsequent hepatocyte growth factor/scatter factor (HGF/SF)-induced phenotypic epithelial-to-mesenchymal transition. Thus, our data show a novel morphogenetic activity for Pax3 which, when absent in vivo, is predicted to give rise to the observed structural defects in somites and the neural tube during embryonic development.