AML1 is one of the most frequently mutated genes associated with human acute leukemia and encodes the DNA-binding subunit of the heterodimering transcriptional factor complex, core-binding factor (CBF) (or polyoma enhancer binding protein 2 [PEBP2]). A null mutation in either AML1 or its dimerizing partner, CBFbeta, results in embryonic lethality secondary to a complete block in fetal liver hematopoiesis, indicating an essential role of this transcription complex in the development of definitive hematopoiesis. The hematopoietic phenotype that results from the loss of AML1 can be replicated in vitro with a two-step culture system of murine embryonic stem (ES) cells. Using this experimental system, we now demonstrate that this hematopoietic defect can be rescued by expressing the PEBP2alphaB1 (AML1b) isoform under the endogenous AML1-regulatory sequences through a knock-in (targeted insertion) approach. Moreover, we demonstrate that the rescued AML1(-/-) ES cell clones contribute to lymphohematopoiesis within the context of chimeric animals. Rescue requires the transcription activation domain of AML1 but does not require the C-terminal VWRPY motif, which is conserved in all AML1 family members and has been shown to interact with the transcriptional corepressor, Groucho/transducin-like Enhancer of split. Taken together, these data provide compelling evidence that the phenotype seen in AML1-deficient mice is due solely to the loss of transcriptionally active AML1.