Fli-1, an ets related gene, was found to be rearranged in 75% of erythroleukemias induced by Friend murine leukemia virus. We have shown previously that the Fli-1 gene codes for a sequence specific transcriptional activator which contains two autonomous transcriptional activation domains, one at the amino terminal region and the other at the carboxy terminal region. Recently human Fli-1 gene was shown to be involved in Ewing's sarcoma and related subtypes of primitive neuroectodermal tumors which share t(11;22) (q24;q12) chromosome translocation. In these tumors the carboxyl terminal region of Fli-1 was found to be fused with the amino terminal region of a putative RNA binding protein, EWS. Because part of the amino terminal transcriptional activation domain of Fli-1 was replaced with the amino terminal domain of the EWS (NTD-EWS) which shares homology with RNA polymerase II, it was speculated that NTD-EWS may interfere with RNA pol II function. Alternatively, NTD-EWS could also contribute to the transcriptional activation function of EWS/Fli-1 chimeric protein by providing either a modulatory/regulatory domain or a novel transcriptional activation domain. Here we show that EWS/Fli-1 chimeric protein functions as a transcriptional activator. Deletion analysis reveals that the EWS domain functions as a modulatory/regulatory domain for the transcriptional activation properties of the carboxy terminal transcriptional activation domain of EWS/Fli-1. We therefore propose that replacement of the amino terminal transcriptional activation domain of the Fli-1 protein with the regulatory domain of NTD-EWS results in the activation of the carboxy terminal transcriptional activation domain of Fli-1 which may be the molecular mechanism involved in these human tumors.