The t(12;21)(p13;q22) translocation is the most common chromosomal abnormality yet identified in any pediatric leukemia and gives rise to the TEL-AML1 fusion product. To investigate the effects of TEL-AML1 on hematopoiesis, fetal liver hematopoietic progenitor cells (HPCs) were transduced with retroviral vectors expressing this fusion protein. We show that TEL-AML1 dramatically alters differentiation of HPCs in vitro, preferentially promoting B-lymphocyte development, enhancing self-renewal of B-cell precursors, and leading to the establishment of long-term growth factor-dependent pre-B-cell lines. However, it had no effect on myeloid development in vitro. Further experiments were performed to determine whether TEL-AML1 also demonstrates lineage-specific activity in vivo. TEL-AML1-expressing HPCs displayed a competitive advantage in reconstituting both B-cell and myeloid lineages in vivo but had no effect on reconstitution of the T-cell lineage. Despite promoting these alterations in hematopoiesis, TEL-AML1 did not induce leukemia in transplanted mice. Our study provides a unique insight into the role of TEL-AML1 in leukemia predisposition and a potential model to study the mechanism of leukemogenesis associated with this fusion.