The t(2;13) chromosomal translocation in alveolar rhabdomyosarcoma tumors (ARMS) creates an oncogenic transcriptional activator by fusion of PAX3 DNA binding motifs to a COOH-terminal activation domain derived from the FKHR gene. The dominant oncogenic potential of the PAX3-FKHR fusion protein is dependent on the FKHR activation domain. We have fused the KRAB repression module to the PAX3 DNA binding domain as a strategy to suppress the activity of the PAX3-FKHR oncogene. The PAX3-KRAB protein bound PAX3 target DNA sequences and repressed PAX3-dependent reporter plasmids. Stable expression of the PAX3-KRAB protein in ARMS cell lines resulted in loss of the ability of the cells to grow in low-serum or soft agar and to form tumors in SCID mice. Stable expression of a PAX3-KRAB mutant, which lacks repression function, or a KRAB protein alone, lacking a PAX3 DNA binding domain, failed to suppress the ARMS malignant phenotype. These data suggest that the PAX3-KRAB repressor functions as a DNA-binding-dependent suppressor of the transformed phenotype of ARMS cells, probably via competition with the endogenous PAX3-FKHR oncogene and repression of target genes required for ARMS tumorigenesis. The engineered repressor approach that directs a transcriptional repression domain to target genes deregulated by the PAX3-FKHR oncogene may be a useful strategy to identify the target genes critical for ARMS tumorigenesis.