TEL is a member of the Ets family of transcription factors which are frequently rearranged in human leukemia. The mechanism of TEL-mediated transformation, however, is unknown. We report the cloning and characterization of a chromosomal translocation associated with acute myeloid leukemia which fuses TEL to the ABL tyrosine kinase. The TEL-ABL fusion confers growth factor-independent growth to the marine hematopoietic cell line Ba/F3 and transforms Rat-1 fibroblasts and primary murine bone marrow cells. TEL-ABL is constitutively tyrosine phosphorylated and localizes to the cytoskeleton. A TEL-ABL mutant containing an ABL kinase-inactivating mutation is not constitutively phosphorylated and is nontransforming but retains cytoskeletal localization. However, constitutive phosphorylation, cytoskeletal localization, and transformation are all dependent upon a highly conserved region of TEL termed the helix-loop-helix (HLH) domain. TEL-ABL formed HLH-dependent homo-oligomers in vitro, a process critical for tyrosine kinase activation. These experiments suggest that oligomerization of TEL-ABL mediated by the TEL HLH domain is required for tyrosine kinase activation, cytoskeletal localization, and transformation. These data also suggest that oligomerization of Ets proteins through the highly conserved HLH domain may represent a previously unrecognized phenomenon.