Alveolar rhabdomyosarcoma (ARMS) is an aggressive pediatric cancer of skeletal muscle. More than 70% of ARMS tumors carry balanced t(2;13) chromosomal translocation that leads to the production of two novel fusion genes, PAX3-FKHR and FKHR-PAX3. While the PAX3-FKHR gene has been intensely studied, the reciprocal FKHR-PAX3 gene has rarely been described. We report here the cloning and functional characterization of the FKHR-PAX3 gene as the first step towards a better understanding of its potential impact on ARMS biology. From RH30 ARMS cells, we detected and isolated three versions of FKHR-PAX3 cDNAs whose C-terminal sequences corresponded to PAX3c, PAX3d, and PAX3e isoforms. Unlike the nuclear-specific localization of PAX3-FKHR, the reciprocal FKHR-PAX3 proteins stayed predominantly in the cytoplasm. FKHR-PAX3 potently inhibited myogenesis in both non-transformed myoblast cells and ARMS cells. We showed that FKHR-PAX3 was not a classic oncogene but could act as a facilitator in oncogenic pathways by stabilizing PAX3-FKHR expression, enhancing cell proliferation, clonogenicity, anchorage-independent growth, and matrix adhesion in vitro, and accelerating the onset of tumor formation in xenograft mouse model in vivo. In addition to these pro-oncogenic behaviors, FKHR-PAX3 also negatively affected cell migration and invasion in vitro and lung metastasis in vivo. Taken together, these functional characteristics suggested that FKHR-PAX3 might have a critical role in the early stage of ARMS development.