The translocation (8;21), generating the AML1-ETO fusion protein, is one of the most frequent chromosomal abnormalities associated with acute myelogenous leukemia (AML). To elucidate its role in oncogenesis, bone marrow (BM) cells were infected with a retroviral vector carrying AML1-ETO and transplanted into mice. In contrast to previous transgenic mouse models, we show that AML1-ETO directly stimulates granulopoiesis, suppresses erythropoiesis, and impairs the maturation of myeloid, B, and T lymphoid cells in vivo. To determine the significance of earlier findings that expression of the tumor suppressor ICSBP is often downregulated in AML myeloblasts, AML1-ETO was introduced into BM cells derived from mice lacking the interferon regulatory factor ICSBP. Our findings demonstrate that AML1-ETO synergizes with an ICSBP deficiency to induce myeloblastic transformation in the BM, reminiscent of AML.