Alveolar rhabdomyosarcoma (ARMS) is an aggressive myogenic-type tumor and a gain-of-function disease, caused by misexpression of the PAX3-FKHR or PAX7-FKHR fusion oncoprotein from structurally rearranged chromosomes. PAX3-FKHR misexpressed in terminally differentiating mouse myofibers can cause rhabdomyosarcoma at a low frequency, suggesting that skeletal muscle is an ARMS tissue of origin. Because patterned muscle is widely viewed as irreversibly syncytial, questions persist, however, regarding this potential pathogenetic mechanism for ARMS tumor initiation. To further explore this issue, we generated transgenic Drosophila lines that conditionally express human PAX-FKHR. Here we show that PAX7-FKHR causes nucleated cells to form and separate from syncytial myofibers, which then spread to nonmuscular tissue compartments, including the central nervous system, and that wild-type PAX3 demonstrates similar potential. We further show that Ras, which is known to interfere with the differentiation of myogenic cells, genetically interacts with PAX7-FKHR: constitutively activated Ras enhances PAX7-FKHR phenotypes, whereas loss-of-function ras alleles dominantly suppress PAX7-FKHR activity, including rescue of lethality. These results show that PAX-FKHR can drive the generation of discrete nucleated cells from differentiated myofibers in vivo, argue for syncytial muscle as an ARMS tissue of origin, and demonstrate that Drosophila provides a powerful system to screen for genetic modifiers of PAX-FKHR.