The transcription factor hypoxia inducible factor 1 (HIF1), an HIF1alpha-aryl hydrocarbon receptor nuclear translocator (ARNT) dimeric factor, is essential to the cellular response to hypoxia. We described a t(1;12)(q21;p13) chromosomal translocation in human acute myeloblastic leukemia that involves the translocated Ets leukemia (TEL/ETV6) and the ARNT genes and results in the expression of a TEL-ARNT fusion protein. Functional studies show that TEL-ARNT interacts with HIF1alpha and the complex binds to consensus hypoxia response element. In low oxygen tension conditions, the HIF1alpha/TEL-ARNT complex does not activate transcription but exerts a dominant-negative effect on normal HIF1 activity. Differentiation of normal human CD34+ progenitors cells along all the erythrocytic, megakaryocytic and granulocytic pathways was accelerated in low versus high oxygen tension conditions. Murine 32Dcl3 myeloid cells also show accelerated granulocytic differentiation in low oxygen tension in response to granulocyte colony-stimulating factor. Interestingly, stable expression of the TEL-ARNT in 32Dcl3 subclones resulted in impaired HIF1-mediated transcriptional response and inhibition of differentiation enhancement in hypoxic conditions. Taken together, our results underscore the role of oxygen tension in the modulation of normal hematopoietic differentiation, whose targeting can participate in human malignancies.