The t(12;21) translocation, which generates the TEL-AML1 (ETV6-RUNX1) fusion gene, is the most common structural chromosome change in childhood cancer and is exclusively associated with the common B cell precursor subset of acute lymphoblastic leukemia (ALL). Evidence suggests that the translocation usually occurs in utero during fetal hemopoiesis and most probably constitutes an initiating or first-hit mutation that is necessary but insufficient for the development of overt, clinical leukemia. The mechanism by which TEL-AML1 contributes to this early stage of leukemogenesis is unknown. To address this question we have analyzed hemopoiesis in mice syngeneically transplanted with TEL-AML1-transduced bone marrow stem cells. TEL-AML1 expression was associated with an accumulation/expansion of primitive c-kit-positive multipotent progenitors and a modest increase in myeloid colony-forming cells. TEL-AML1 expression was, however, permissive for myeloid differentiation. Analysis of B lymphopoiesis revealed an increase in early, pro-B cells but a differentiation deficit beyond that stage, resulting in reduced B cell production in the marrow. TEL-AML1-positive B cell progenitors exhibited reduced expression of the surrogate light-chain component lambda5 and the IL-7 receptor, both of which may contribute to impedance of differentiation in vivo and account for their reduced in vitro clonogenicity in IL-7. A selective differentiation deficit of B lineage progenitors (i) is consistent with the phenotype of TEL-AML1-associated leukemia in children and (ii) provides a potential mechanism for the protracted preleukemic state that often precedes ALL. These results provide mechanistic insight into the role of the t(12;21) translocation in the initiation of common B cell precursor ALL.