Core-binding factor beta (CBFbeta) is the non-DNA-binding subunit of the heterodimeric CBFs. Genes encoding CBFbeta (CBFB), and one of the DNA-binding CBFalpha subunits, Runx1 (also known as CBFalpha2, AML1, and PEBP2alphaB), are required for normal hematopoiesis and are also frequent targets of chromosomal translocations in acute leukemias in humans. Homozygous disruption of either the Runx1 or Cbfb gene in mice results in embryonic lethality at midgestation due to hemorrhaging in the central nervous system, and severely impairs fetal liver hematopoiesis. Results of this study show that Cbfb-deficient mouse embryonic stem (ES) cells can differentiate into primitive erythroid colonies in vitro, but are impaired in their ability to produce definitive erythroid and myeloid colonies, mimicking the in vivo defect. Definitive hematopoiesis is restored by ectopic expression of full-length Cbfb transgenes, as well as by a transgene encoding only the heterodimerization domain of CBFbeta. In contrast, the CBFbeta-smooth muscle myosin heavy chain (SMMHC) fusion protein generated by the inv(16) associated with acute myeloid leukemias (M4Eo) cannot rescue definitive hematopoiesis by Cbfb-deficient ES cells. Sequences responsible for the inability of CBFbeta-SMMHC to rescue definitive hematopoiesis reside in the SMMHC portion of the fusion protein. Results also show that the CBFbeta-SMMHC fusion protein transdominantly inhibits definitive hematopoiesis, but not to the same extent as homozygous loss of Runx1 or Cbfb. CBFbeta-SMMHC preferentially inhibits the differentiation of myeloid lineage cells, while increasing the number of blastlike cells in culture.