The 8;21 translocation is the most common cytogenetic abnormality in human acute myelogenous leukemia, joining the AML1 gene on chromosome 21, to the ETO gene on chromosome 8, forming the AML1/ETO fusion gene. The AMLI/ETO fusion protein has been shown to function mainly as a transcriptional repressor of AML1 target genes and to block AML1 function in vitro and in vivo. However, AML1/ETO can also activate the BCL-2 promoter and cause enhanced hematopoietic progenitor self-renewal in vitro, suggesting gain-of-functions unique to the fusion protein. We used NIH3T3 cells to determine the transforming capacity of AML1/ETO, and to further characterize its mechanism of action. Expression of AML1/ETO in NIH3T3 cells caused cell-type specific cell death, and cellular transformation, characterized by phenotypic changes, anchorage-independent growth, and tumor formation in nude mice. In contrast, neither expression of AML1A, AML1B or ETO altered the normal growth pattern of the cells. To investigate the mechanism of transformation by AML1/ETO, we analysed the levels of activated, phosphorylated c-Jun (ser63) and other constituents of the AP-1 complex, in the presence of various AML1/ETO related proteins. Expression of AML1/ETO increased the level of c-Jun-P (ser63), and activated AP-1 dependent transcription, which was inhibited by expression of a dominant-negative c-Jun protein. Mutational analysis revealed that the runt homology domain (RHD) and a C-terminal transcriptional repression domain in AML1/ETO are required for transformation, activation of c-Jun and increased AP-1 activity. These results establish the transforming potential of the t(8;21) fusion protein and link this gain-of-function property to modulation of AP-1 activity.