Alveolar rhabdomyosarcomas (ARMS) escape terminal differentiation despite exhibiting a skeletal muscle phenotype. To understand the role of the ARMS-specific PAX-FKHR proteins in myogenesis, we characterized their regulation of MyoD expression and function. Reporter assays show that PAX-FKHR transactivate MyoD expression through its 258 bp core enhancer. Gel-shift assays confirm that PAX-FKHR bind to core enhancer sequences showing similarity to consensus PAX3/PAX-FKHR-binding sites. We show that while PAX3-FKHR activates the expression of endogenous MyoD and myogenin proteins in transduced NIH3T3 fibroblasts, it inhibits them from terminally differentiating as shown by low myogenin and myosin heavy chain expression, and lack of myotube formation. Attenuation of MyoD transcriptional activity via phosphorylation coupled to the lack of cell cycle arrest is the underlying mechanism for the differentiation block. Lastly, we show that fibroblast growth factor receptor signaling likely mediates the inhibition of differentiation by PAX3-FKHR. In a single experimental system we demonstrate that PAX3-FKHR can simultaneously induce myogenesis while preventing its completion. We propose a model whereby PAX-FKHR commit a yet undefined precursor cell to the myogenic lineage while at the same time inhibit terminal differentiation, thereby contributing to ARMS formation.