BCR-ABL is a chimeric oncoprotein that exhibits deregulated tyrosine kinase activity and is implicated in the pathogenesis of Philadelphia chromosome (Ph¹)-positive human leukemias. Sequences within the first exon of BCR are required to activate the transforming potential of BCR-ABL. The SH2/SH3 domain-containing GRB-2 protein links tyrosine kinases to Ras signaling. We demonstrate that BCR-ABL exists in a complex with GRB-2 in vivo. Binding of GRB-2 to BCR-ABL is mediated by the direct interaction of the GRB-2 SH2 domain with a phosphorylated tyrosine, Y177, within the BCR first exon. The BCR-ABL-GRB-2 interaction is required for activation of the Ras signaling pathway. Mutation of Y177 to phenylalanine (Y177F) abolishes GRB-2 binding and abrogates BCR-ABL-induced Ras activation. The BCR-ABL (Y177F) mutant is unable to transform primary bone marrow cultures and is impaired in its ability to transform Rat 1 fibroblasts. These findings implicate activation of Ras function as an important component in BCR-ABL-mediated transformation and demonstrate that GRB-2 not only functions in normal development and mitogenesis but also plays a role in oncogenesis.