Chromosomal translocations resulting in the expression of chimaeric transcription factors are frequently observed in tumour cells 1, and have been suggested to be a common mechanism in human carcinogenesis. Ewing sarcoma and related peripheral primitive neuroectodermal tumours share recurrent translocations that fuse the gene EWSR1 (formerly EWS) from 22q–12 to FLI1 and genes encoding other ETS transcription factors 2, 3, 4 (which bind DNA through the conserved ETS domain 5, 6). It has been shown that transduction of the gene EWSR1-FLI1 (encoding EWS-FLI1 protein) can transform NIH3T3 cells, and that mutants containing a deletion in either the EWS domain or the DNA-binding domain in FLI1 lose this ability 5, 6, 7, 8. This indicates that the EWS-FLI1 fusion protein may act as an aberrant transcription factor, but the exact mechanism of oncogenesis remains unknown. Because ETS transcription factors regulate expression of TGFBR2 (encoding the TGF-β type II receptor, TGF-β RII; Refs 9, 14), a putative tumour suppressor gene, we hypothesized that TGFBR2 may be a target of the EWS-FLI1 fusion protein. We show here that embryonic stem (ES) cell lines with the EWSR1-FLI1 fusion have reduced TGF-β sensitivity, and that fusion-positive ES cells and primary tumours both express low or undetectable levels of TGFBR2 mRNA and protein product. Co-transfection of FLI1 and the TGFBR2 promoter induces promoter activity, whereas EWSR1-FLI1 leads to suppression of TGFBR2 promoter activity and FLI1-induced promoter activity. Introduction of EWSR1-FLI1 into cells lacking the EWSR1-FLI1 fusion suppresses TGF-β RII expression, whereas antisense to EWSR1-FLI1 in ES cell lines positive for this gene fusion restores TGF-β RII expression. Furthermore, introduction of normal TGF-β RII into ES cell lines restores TGF-β sensitivity and blocks tumorigenicity. Our results implicate TGF-β RII as a direct target of EWS-FLI1.