Tumors have evolved elaborate mechanisms for evading immune detection, such as production of immunoinhibitory cytokines and down-regulation of major histocompatibility complex (MHC) expression. We have studied PAX3-FKHR as an example of an oncogenic fusion protein associated with an aggressive metastatic cancer. We show that PAX3-FKHR alters expression of genes that are normally regulated by Janus kinase/signal transducer and activator of transcription (STAT) signaling pathways. This occurs as a result of a specific interaction between PAX3-FKHR and the STAT3 transcription factor, which results in a dramatic reduction in tumor MHC expression, and an alteration in local cytokine concentrations to inhibit surrounding inflammatory cells and immune detection. Collectively, these data show that an oncogenic transcription factor can promote tumor growth and tissue invasion while inhibiting local inflammatory and immune responses. This is the first time that an immunomodulatory role has been described for an oncogenic fusion protein.