Alveolar rhabdomyosarcoma (aRMS), an aggressive skeletal muscle cancer, carries a unique t(2;13) chromosomal translocation resulting in the formation of a chimeric transcription factor PAX3-FKHR. This fusion protein contains the intact DNA-binding domains (PD: paired box binding domain; HD: paired-type homeodomain) of Pax3 fused to the activation domain of FKHR. Cells expressing Pax3 and PAX3-FKHR show vastly different gene expression patterns, despite that they share the same DNA-binding domains. We present evidence of a gain of function mechanism that allows the fusion protein to recognize and transcriptionally activate response elements containing a PD-specific binding site. This DNA recognition specificity is in contrast to the requirement for Pax3-specific target sequences that must contain a composite of PD-and HD-binding sites. Domain swapping studies suggest that an increased structural flexibility could account for the relaxed DNA targeting specificity in PAX3-FKHR. Here, we identify myogenin gene as a direct target of PD-dependent PAX3-FKHR activation pathway in vitro and in vivo. We demonstrate that PAX3-FKHR could induce myogenin expression in undifferentiated myoblasts by a MyoD independent pathway, and that PAX3-FKHR is directly involved in myogenin expression in aRMS cells.