The polyomavirus enhancer binding protein 2 (PEBP2)/core binding factor (CBF) is a transcription factor composed of two subunits, α and β. The gene encoding the β subunit is disrupted by inv (16), resulting in the formation of a chimeric protein, β-SMMHC, which is associated with acute myelogenous leukemia. To understand the effect of β-SMMHC on PEBP2-mediated transactivation, we used a luciferase assay system in which contribution of both the α and β subunits was absolutely required to activate transcription. Using this system, we found that the minimal region of the β subunit required for transactivation resides between amino acid 1 and 135, which is known to dimerize with the α subunit. In contrast, β-SMMHC, despite having this minimal region for dimerization and transactivation, failed to support transcription with the α subunit. Furthermore β-SMMHC blocked the synergistic transcription achieved by PEBP2 and CCAAT/enhancer binding protein α. By using a construct in which the PEBP2 α subunit was fused to the glucocorticoid receptor ligand binding domain, we demonstrated that coexpressed β-SMMHC tightly sequestered the α subunit in the cytoplasm and blocked dexamethasone-dependent nuclear translocation of the α subunit. Thus, the result suggess that β-SMMHC inhibits PEBP2-mediated transcription via cytoplasmic sequestration of the α subunit. Lastly proliferation of ME-1 cells that harbor inv (16) was blocked by an antisense oligonucleotide complementary to the junction of the chimeric mRNA, suggesting that β-SMMHC contributes to leukemogenesis by blocking the differentiation of myeloid cells.