Using conditional knock-in and knock-out techniques, we designed a mouse model of the childhood muscle cancer alveolar rhabdomyosarcoma (ARMS) that is driven by the chromosomal translocation product, Pax3:Fkhr. Tumors that closely recapitulate the spectrum of molecular markers and histology seen in human ARMS are exclusively produced in this model. Unexpectedly, expression of Pax3:Fkhr in muscle satellite cells did not produce tumors, but it did in differentiating myofibers. Expression of Pax3:Fkhr in muscle is necessary but not sufficient to initiate tumorigenesis at high frequency. This model offers new insight into the roots of alveolar rhabdomyosarcoma and illustrates the utility of Cre-loxP technology for studying otherwise inaccessible cancers in the mouse.