The tel gene, recently shown to be translocated in a spectrum of acute and chronic human leukemias, belongs to the ets family of sequence-specific transcription factors. To determine the role of Tel in normal hematopoietic development, we used the tel gene as the bait in the yeast two-hybrid system to screen a hematopoietic stem cell library. Two partners were identified: Tel binds to itself, and Tel binds to the ets family member Fli-1. In vitro and in vivo assays confirmed these interactions. In transient transfection assays, Fli-1 transactivates megakaryocytic specific promoters, and Tel inhibits this effect of Fli-1. Transactivation studies using deletion mutants of Tel, and the Tel-AML-1 fusion protein, indicate that the helix-loop-helix domain of Tel only partially inhibits transactivation and that complete inhibition requires the full-length Tel molecule, including the DNA binding domain. The Tel and Fli-1 proteins are expressed early in hematopoiesis, and the inability of Tel fusion proteins such as Tel-AML-1 to counteract Fli-1 mediated transactivation may contribute to the malignant phenotype in human leukemias where this fusion protein is present.