BCR-ABL is a chimeric oncoprotein that exhibits deregulated tyrosine kinase activity and is implicated in the pathogenesis of Philadelphia chromosome (Ph1)-positive human leukemias. Sequences within the first exon of BCR are required to activate the transforming potential of BCR-ABL. The SH2/SH3 domain-containing GRB-2 protein links tyrosine kinases to Ras signaling. We demonstrate that BCR-ABL exists in a complex with GRB-2 in vivo. Binding of GRB-2 to BCR-ABL is mediated by the direct interaction of the GRB-2 SH2 domain with a phosphorylated tyrosine, Y177, within the BCR first exon. The BCR-ABL-GRB-2 interaction is required for activation of the Ras signaling pathway. Mutation of Y177 to phenylalanine (Y177F) abolishes GRB-2 binding and abrogates BCR-ABL-induced Ras activation. The BCR-ABL (Y177F) mutant is unable to transform primary bone marrow cultures and is impaired in its ability to transform Rat1 fibroblasts. These findings implicate activation of Ras function as an important component in BCR-ABL-mediated transformation and demonstrate that GRB-2 not only functions in normal development and mitogenesis but also plays a role in oncogenesis.