The transcription factor PU.1 plays a pivotal role in normal myeloid differentiation. PU.1^−/− mice exhibit a complete block in myeloid differentiation. Heterozygous PU.1 mutations were reported in some patients with acute myeloid leukemia (AML), but not in AML with translocation t(8;21), which gives rise to the fusion geneAML1-ETO. Here we report a negative functional impact of AML1-ETO on the transcriptional activity of PU.1. AML1-ETO physically binds to PU.1 in t(8;21)⁺ Kasumi-1 cells. AML1-ETO binds to the β₃β₄ region in the DNA-binding domain of PU.1 and displaces the coactivator c-Jun from PU.1, thus down-regulating the transcriptional activity of PU.1. This physical interaction of AML1-ETO and PU.1 did not abolish the DNA-binding capacity of PU.1. AML1-ETO down-regulates the transactivation capacity of PU.1 in myeloid U937 cells, and the expression levels of PU.1 target genes in AML French-American-British (FAB) subtype M2 patients with t(8;21) were lower than in patients without t(8;21). Conditional expression of AML1-ETO causes proliferation in mouse bone marrow cells and inhibits antiproliferative function of PU.1. Overexpression of PU.1, however, differentiates AML1-ETO–expressing Kasumi-1 cells to the monocytic lineage. Thus, the function of PU.1 is down-regulated by AML1-ETO in t(8;21) myeloid leukemia, whereas overexpression of PU.1 restores normal differentiation.