Chimeric transcription factors, created by gene fusions as the result of chromosomal translocations, have been implicated in the pathogenesis of several pathologically disparate solid tumors. The PAX3/FKHR fusion gene, formed by a t(2;13)(q35;q14) in alveolar rhabdomyosarcoma, encodes a hybrid protein that contains both PAX3 DNA binding domains, the paired box and homeodomain, linked to the bisected DNA binding domain of FKHR, a member of the forkhead family of transcription factors. Here we report that PAX3 and PAX3/FKHR display similar, but not identical transactivation activities when tested with model Pax recognition sequences. No functional role could be ascribed solely to the residual FKHR binding domain present in the fusion protein, but FKHR was found to contribute a strong carboxyl terminal activation domain replacing the one located in the unrearranged PAX3 gene. We show that the native PAX3/FKHR protein present in tumor cells with this translocation has transcriptional characteristics similar to the in vitro expressed protein. The ability of the PAX3/FKHR hybrid protein to bind DNA in a sequence specific manner and to transactivate the expression of artificial reporter genes suggests that its aberrant expression could subvert the transcriptional programs that normally control the growth, differentiation, and survival of primitive myogenic precursors in vivo.