The t(8;21) translocation, found in adult acute myelogenous leukemia, results in the formation of an AML1/ETO chimeric transcription factor. AML1/ETO expression leads to alterations in hematopoietic progenitor cell differentiation, although its role in leukemic transformation is not clear. The N-terminal portion of AML1, which is retained in AML1/ETO, contains a region of homology to the FAST proteins, which cooperate with Smads to regulate transforming growth factor beta1 (TGF-beta1) target genes. We have demonstrated the physical association of Smad proteins with AML1 and AML1/ETO by immunoprecipitation and have mapped the region of interaction to the runt homology domain in these AML1 proteins. Using confocal microscopy, we demonstrated that AML1, and ETO and/or AML1/ETO, colocalize with Smads in the nucleus of t(8;21)-positive Kasumi-1 cells, in the presence but not the absence of TGF-beta1. Using transient transfection assays and a reporter gene construct that contains both Smad and AML1 consensus binding sequences, we demonstrated that overexpression of AML1B cooperates with TGF-beta1 in stimulating reporter gene activity, whereas AML1/ETO represses basal promoter activity and blocks the response to TGF-beta1. Considering the critical role of TGF-beta1 in the growth and differentiation of hematopoietic cells, interference with TGF-beta1 signaling by AML1/ETO may contribute to leukemogenesis.