The 2;13 chromosomal translocation occurs in most cases of the cancer alveolar rhabdomyosarcoma (ARMS), and juxtaposes the genes encoding the PAX3 and FKHR transcription factors. The resulting chimeric protein PAX3-FKHR is a potent transcriptional activator, and is hypothesized to function as a dominant acting oncogene. To investigate its biological function, PAX3-FKHR was transduced into three immortalized murine cell lines in either a constitutive or inducible manner. These cells only tolerate expression of low PAX3-FKHR levels, which is sufficient for transformation in NIH3T3 cells. In contrast, higher PAX3-FKHR levels, which are comparable to the endogenous level expressed in ARMS cells, result in growth suppression. To determine as to which PAX3 functional domains are needed for growth suppression and transformation, inactivating mutations were introduced into the paired box and homeodomain of PAX3-FKHR. In these experiments, the homeodomain is necessary for transformation, but not growth suppression; whereas the paired box is not required for transformation but mediates growth suppression. In summary, our findings demonstrate that the transforming and growth suppressive activities of PAX3-FKHR are dominant at different activity levels and are mediated by distinct functional domains. These findings are consistent with the hypothesis that distinct expression pathways are operative in these opposing phenotypic end points.