The block of terminal differentiation is a prominent feature of acute promyelocytic leukemia (APL) and its release by retinoic acid correlates with disease remission. Expression of the APL-specific PML/RARalpha fusion protein in hematopoietic precursor cell lines blocks terminal differentiation, suggesting that PML/ RARalpha may have the same activity in APL blasts. We expressed different PML/RARalpha mutants in U937 and TF-1 cells and demonstrated that the integrity of the PML protein dimerization and RARalpha DNA binding domains is crucial for the differentiation block induced by PML/RARalpha, and that these domains exert their functions only within the context of the fusion protein. Analysis of the in vivo dimerization and cell localization properties of the PML/RARalpha mutants revealed that PML/RARalpha--PML and PML/RARalpha--RXR heterodimers are not necessary for PML/RARalpha activity on differentiation. We propose that a crucial mechanism underlying PML/RARalpha oncogenic activity is the deregulation of a transcription factor, RARalpha, through its fusion with the dimerization interface of another nuclear protein, PML.