The human translocation (t8;21) is associated with approximately 12% of the cases of acute myelogenous leukemia. Two genes, AML1 and ETO, are fused together at the translocation breakpoint, resulting in the expression of a chimeric protein called AML1-ETO. AML1-ETO is thought to interfere with normal AML1 function, although the mechanism by which it does so is unclear. Here, we have used Drosophila genetics to investigate two models of AML1-ETO function. In the first model, AML1-ETO is a constitutive transcriptional repressor of AML1 target genes, regardless of whether they are normally activated or repressed by AML1. In the second model, AML1-ETO dominantly interferes with AML1 activity by, for example, competing for a common co-factor. To discriminate between these models, the effects of expressing AML1-ETO were characterized and compared with loss-of-function phenotypes of lozenge (lz), an AML1 homolog expressed during Drosophila eye development. We also present results of genetic interaction experiments with AML1 co-factors that are not consistent with AML1-ETO behaving as a dominant-negative factor. Instead, our data suggest that AML1-ETO acts as a constitutive transcriptional repressor.