Although recent data have demonstrated that the chimeric EWS-FLI-1 cDNA isolated from cases of Ewing's sarcoma can transform NIH 3T3 cells, little is known about the basis for this transformation. Since FLI-1 and EWS-FLI-1 contain an Ets domain, both proteins may act as sequence-specific transcription factors. Here the DNA binding properties of FLI-1 and EWS-FLI-1 have been examined. An epitope-tagging strategy was developed to determine the optimum DNA-binding sequence of FLI-1. The alignment of cloned binding sequences showed a consensus DNA-binding site of ACCGGAAG/aT/c. This consensus sequence shows greater specificity for sequence 5' of the GGAA core site than those of other Ets proteins. Using several truncated forms of FLI-1, we show that the Ets domain is necessary and sufficient for the DNA binding specificity of FLI-1. The EWS-FLI-1 protein displayed the same DNA binding specificity and affinity as FLI-1 did. Despite their DNA binding similarities, the EWS-FLI-1 translocation product is likely to have a distinct pattern of expression from that of FLI-1 since the translocation results in the replacement of the 5' regulatory region of Fli-1 with that of EWS. Consistent with this we found that Fli-1 mRNA expression in lymphocytes was high in quiescent cells and disappeared upon activation while EWS mRNA expression was low in resting cells and increased in activated T cells. In summary, our data suggest that EWS-FLI-1 might act through the same target genes normally regulated by FLI-1, and EWS-FLI-1-induced transformation may result from dysregulation of FLI-1 target genes during cell proliferation and differentiation.