The oncogenic fusion protein, Pax3/FKHR, is a more potent transcription factor relative to its normal counterpart, Pax3. Since Pax3 induced a mesenchymal to epithelial transition (MET) in human SaOS-2 osteosarcomas, we hypothesized that Pax3/FKHR would also induce a morphological change in SaOS-2 cells. We demonstrate here that Pax3/FKHR more potently induces a MET in SaOS-2 cells than Pax3. This greater potency was further evident where Pax3/FKHR, but not Pax3, induced a morphological alteration in U2-OS osteosarcoma cells. By microarray analysis, we determined that Pax3/FKHR altered the expression of gene targets in a manner quantitatively and qualitatively distinct from Pax3. Three classes of genes were identified: (i) genes induced or repressed by Pax3 and Pax3/FKHR, (ii) genes induced or repressed by Pax3/FKHR but not Pax3 and (iii) genes induced by Pax3/FKHR but repressed by Pax3. Chromatin immunoprecipitations confirmed the direct binding of Pax3/FKHR to the promoter region of several factors including cannabinoid receptor-1, EPHA2 and EPHA4. Verification of the microarray data also revealed coordinate alteration in the expression of factors involved in BMP4 signalling. Regulation of gene expression by Pax3 and Pax3/FKHR is, however, cell-type specific. BMP4 expression, for example, was repressed by both Pax3 and Pax3/FKHR in SaOS-2 cells, while in the rhabdomyosarcoma, RD, Pax3/FKHR, but not Pax3, induced BMP4 expression. Thus, our data reveal that Pax3/FKHR regulates a distinct but overlapping set of genes relative to Pax3 and that the global set of Pax3 and Pax3/FKHR gene targets is cell-type specific.