Cancer stem cells (CSCs) display plasticity and self-renewal properties reminiscent of normal tissue stem cells, but the events responsible for their emergence remain obscure. We recently identified CSCs in Ewing sarcoma family tumors (ESFTs) and showed that they retain mesenchymal stem cell (MSC) plasticity. In the present study, we addressed the mechanisms that underlie ESFT CSC development. We show that the EWS-FLI-1 fusion gene, associated with 85%-90% of ESFTs and believed to initiate their pathogenesis, induces expression of the embryonic stem cell (ESC) genes OCT4, SOX2, and NANOG in human pediatric MSCs (hpMSCs) but not in their adult counterparts. Moreover, under appropriate culture conditions, hpMSCs expressing EWS-FLI-1 generate a cell subpopulation displaying ESFT CSC features in vitro. We further demonstrate that induction of the ESFT CSC phenotype is the result of the combined effect of EWS-FLI-1 on its target gene expression and repression of microRNA-145 (miRNA145) promoter activity. Finally, we provide evidence that EWS-FLI-1 and miRNA-145 function in a mutually repressive feedback loop and identify their common target gene, SOX2, in addition to miRNA145 itself, as key players in ESFT cell differentiation and tumorigenicity. Our observations provide insight for the first time into the mechanisms whereby a single oncogene can reprogram primary cells to display a CSC phenotype.