The t(5;17) variant of acute promyelocytic leukemia (APL) fuses the genes for nucleophosmin (NPM) and the retinoic acid receptor alpha (RARalpha). Two NPM-RAR molecules are expressed as a result of alternative RNA splicing. Both contain RARalpha sequences that encode the DNA binding, heterodimerization, and ligand activation domains of RARalpha. This study was designed to test the ability of these fusion proteins to act as transcriptional activators of retinoic acid responsive promoters. The NPM-RAR fusion proteins bind to retinoic acid response element sequences as either homodimers or as heterodimers with RXR. Transcription of retinoic acid-inducible promoters is activated by the fusion proteins in the presence of retinoic acid. The level of transactivation induced by the NPM-RAR fusions differs from the level of transactivation induced by wild-type RARalpha in both a promoter and cell specific fashion, and more closely parallels the pattern of activation of the PML-RAR fusion than wild-type RARalpha. In addition, NPM-RAR decreases basal transcription from some promoters and acts in a dominant-negative fashion when co-transfected with wild-type RARalpha. Both NPM-RAR and PML-RAR interact with the co-repressor protein SMRTe in a manner that is less sensitive than RARalpha to dissociation by retinoic acid. Retinoic acid induces binding of the co-activator protein RAC3. These data indicate that the NPM-RAR fusion proteins can modulate expression of retinoid-responsive genes in a positive or negative manner, depending on context of the promoter, and lend support to the hypothesis that aberrant transcriptional activation underlies the APL phenotype. (Blood. 2000;95:2683-2690)