The chromosome translocations generating PAX3-FOXO1 and PAX7-FOXO1 chimeric proteins are the primary hallmarks of the paediatric fusion-positive alveolar subtype of Rhabdomyosarcoma (FP-RMS). Despite the ability of these transcription factors to remodel chromatin landscapes and promote the expression of tumour driver genes, they only inefficiently promote malignant transformation in vivo. The reason for this is unclear. To address this, we developed an in ovo model to follow the response of spinal cord progenitors to PAX-FOXO1s. Our data demonstrate that PAX-FOXO1s, but not wild-type PAX3 or PAX7, trigger the trans-differentiation of neural cells into FP-RMS-like cells with myogenic characteristics. In parallel, PAX-FOXO1s remodel the neural pseudo-stratified epithelium into a cohesive mesenchyme capable of tissue invasion. Surprisingly, expression of PAX-FOXO1s, similar to wild-type PAX3/7, reduce the levels of CDK-CYCLIN activity and increase the fraction of cells in G1. Introduction of CYCLIN D1 or MYCN overcomes this PAX-FOXO1-mediated cell cycle inhibition and promotes tumour growth. Together, our findings reveal a mechanism that can explain the apparent limited oncogenicity of PAX-FOXO1 fusion transcription factors. They are also consistent with certain clinical reports indicative of a neural origin of FP-RMS.