The polyomavirus enhancer binding protein 2 (PEBP2)/core binding factor (CBF) is a transcription factor composed of two subunits, alpha and beta. The gene encoding the beta subunit is disrupted by inv(16), resulting in the formation of a chimeric protein, beta-SMMHC, which is associated with acute myelogenous leukemia. To understand the effect of beta-SMMHC on PEBP2-mediated transactivation, we used a luciferase assay system in which contribution of both the alpha and beta subunits was absolutely required to activate transcription. Using this system, we found that the minimal region of the beta subunit required for transactivation resides between amino acid 1 and 135, which is known to dimerize with the alpha subunit. In contrast, beta-SMMHC, despite having this minimal region for dimerization and transactivation, failed to support transcription with the alpha subunit. Furthermore beta-SMMHC blocked the synergistic transcription achieved by PEBP2 and CCAAT/enhancer binding protein alpha. By using a construct in which the PEBP2 alpha subunit was fused to the glucocorticoid receptor ligand binding domain, we demonstrated that coexpressed beta-SMMHC tightly sequestered the alpha subunit in the cytoplasm and blocked dexamethasone-dependent nuclear translocation of the alpha subunit. Thus, the result suggess that beta-SMMHC inhibits PEBP2-mediated transcription via cytoplasmic sequestration of the alpha subunit. Lastly proliferation of ME-1 cells that harbor inv(16) was blocked by an antisense oligonucleotide complementary to the junction of the chimeric mRNA, suggesting that beta-SMMHC contributes to leukemogenesis by blocking the differentiation of myeloid cells.