In human myxoid liposarcoma, a chromosomal rearrangement leads to fusion of the growth-arresting and DNA-damage-inducible transcription factor CHOP (GADD153) to a peptide fragment encoded by the TLS gene. We have found that wild-type TLS and a closely related sarcoma-associated protein, EWS, are both abundant nuclear proteins that associate in vivo with products of RNA polymerase II transcription. This association leads to the formation of a ternary complex with other heterogeneous RNA-binding proteins (hnRNPs), such as A1 and C1/C2. An NIH-3T3-based transformation assay was used to study the oncogenic role of the sarcoma-associated domain of these RNA-binding proteins. Transduction of the TLS-CHOP oncogene into cells by means of a retroviral expression vector leads to loss of contact inhibition, acquisition of the ability to grow as colonies in soft agar, and tumor formation in nude mice. Mutations that interfere with the function of the leucine zipper dimerization domain or the adjacent basic region of CHOP abolish transformation. The essential role of the TLS component was revealed by the inability of truncated forms to fully transform cells. Domain swap between TLS- and EWS-associated oncogenes demonstrated that the component contributed by the RNA-binding proteins are functionally interchangeable, whereas the transcription factor component specifies tumor phenotype. The sarcoma-associated component of TLS and EWS contribute a strong transcriptional activation domain to the fusion proteins; however, transforming activity cannot be fully substituted by fusion of CHOP to other strong trans-activators. The juxtaposition of a novel effector domain from sarcoma-associated RNA-binding proteins to the targeting domain of transcription factors such as CHOP leads to the creation of a potent oncogene.