EWS/FLI-1 is a chimeric protein formed by a tumor-specific 11;22 translocation found in both Ewing's sarcoma and primitive neuroectodermal tumor of childhood. EWS/FLI-1 has been shown to be a potent transforming gene, suggesting that it plays an important role in the genesis of these human tumors. We now demonstrate that EWS/FLI-1 has the characteristics of an aberrant transcription factor. Subcellular fractionation experiments localized the EWS/FLI-1 protein to the nucleus of primitive neuroectodermal tumor cells. EWS/FLI-1 specifically bound in vitro an ets-2 consensus sequence similarly to normal FLI-1. When coupled to a GAL4 DNA-binding domain, the amino-terminal EWS/FLI-1 region was a much more potent transcriptional activator than the corresponding amino-terminal domain of FLI-1. Finally, EWS/FLI-1 efficiently transformed NIH 3T3 cells, but FLI-1 did not. These data suggest that EWS/FLI-1, functioning as a transcription factor, leads to a phenotype dramatically different from that of cells expressing FLI-1. EWS/FLI-1 could disrupt normal growth and differentiation either by more efficiently activating FLI-1 target genes or by inappropriately modulating genes normally not responsive to FLI-1.