Alveolar rhabdomyosarcoma (ARMS) is characterized cytogenetically by a t(2;13)(q35;q14) chromosomal translocation involving two transcription factor genes: PAX3 and FKHR. ARMS cells express a PAX3-FKHR fusion protein containing the complete N-terminal, DNA-binding domain of PAX3 and the C-terminus of FKHR. Recently we demonstrated that PAX3-FKHR is a more potent transcriptional activator than PAX3 despite impaired binding to canonical PAX3 binding sites. Therefore, we propose that the gene fusion results in switching of PAX3 and FKHR transactivation domains with distinct structure, potency or function. To compare the PAX3 and putative PAX3-FKHR transactivation domains, we fused C-terminal test fragments to the heterologous GAL4 DNA-binding domain and tested activation of a reporter gene co-transfected into four cell types. GAL4-PAX3 and GAL4-PAX3-FKHR were found to be potent activators exhibiting different concentration-dependent transactivation profiles and distinct structural motifs. Deletion mapping demonstrated essential acidic and/or serine/threonine-rich domains in the extreme 3' ends of their respective coding regions and positive modifying elements in adjacent 5' sequences. These data demonstrate that PAX3 and PAX3-FKHR contain structurally distinct transcriptional activation domains and suggest that a consequent difference in function is important for oncogenesis.