Paediatric rhabdomyosarcomas (RMS) are classified into two major subtypes based on histological appearance, embryonal (ERMS) and alveolar (ARMS), but this clinically critical distinction is often difficult on morphological grounds alone. ARMS, the more aggressive subtype, is associated in most cases with unique recurrent translocations fusing the PAX3 or PAX7 transcription factor genes to FKHR. In contrast, ERMS lacks unique genetic alterations. To identify novel diagnostic markers and potential therapeutic targets, we analysed the global gene expression profiles of these two RMS subtypes in 23 ARMS (16 PAX3‐FKHR, 7 PAX7‐FKHR) and 15 ERMS (all PAX‐FKHR‐negative) using Affymetrix HG‐U133A oligonucleotide arrays. A statistically stringent supervised comparison of the ARMS and ERMS expression profiles revealed 121 genes that were significantly differentially expressed, of which 112 were higher in ARMS, including genes of interest as potential diagnostic markers or therapeutic targets, such as CNR1, PIPOX (sarcosine oxidase), and TFAPβ. Interestingly, many known or putative downstream targets of PAX3‐FKHR were highly overexpressed in ARMS relative to ERMS, including CNR1, DCX, ABAT, ASS, JAKMIP2, DKFZp762M127, and NRCAM. We validated the highly differential expression of five genes, including CNR1, DKFZp762M127, DCX, PIPOX, and FOXF1 in ARMS relative to ERMS by quantitative RT‐PCR on an independent set of samples. Finally, we developed a ten‐gene microarray‐based predictor that distinguished ARMS from ERMS with approximately 95% accuracy both in our data by cross‐validation and in an independent validation using a published dataset of 26 samples. The gene expression signature of ARMS provides a source of potential diagnostic markers, therapeutic targets, and PAX‐FKHR downstream genes, and can be used to reliably distinguish these sarcomas from ERMS. Copyright © 2007 Pathological Society of Great Britain and Ireland. Published by John Wiley & Sons, Ltd.