The t (12; 21) translocation, generating the TEL/AML1 fusion protein, is the most common genetic lesion in childhood cancer. Using a bone marrow transplantation model, we demonstrate that TEL/AML1 expression impinges on normal hematopoietic differentiation, leading to the in vivo accumulation and persistence of an early progenitor compartment with a Sca1+/Kit hi/CD11b+ phenotype and an increased self-renewal capacity, as documented by replating assays in vitro. Differentiation of these cells is not blocked, but the frequency of mature blood cells arising from TEL/AML1-transduced progenitors is low. Impaired differentiation is prominently observed in the pro-B-cell compartment, resulting in an proportional increase in early progenitors in vivo, consistent with the t (12; 21) ALL phenotype. Despite the accumulation of both multipotent and B-cell progenitors in vivo, no leukemia induction was observed during an observation period of over 1 year. These results are consistent with findings in twins with concordant ALL, showing that TEL/AML1 generates a preleukemic clone in utero that persists for several years in a clinically covert fashion. Furthermore, our studies showed that the pointed domain of TEL/AML1, which recruits transcriptional repressors and directs oligomerization with either TEL/AML1 or wild-type TEL, was essential for the observed differentiation impairment and could not be replaced with another oligomerization domain.