We analyzed a complex chromosomal translocation in a case of embryonal rhabdomyosarcoma (RMS) and showed that it generates the fusion gene PAX3 (paired box 3)-NCOA2 (nuclear receptor coactivator 2). To understand the role of this translocation in RMS tumorigenesis, we established two types of stable mouse myoblast C2C12 cell lines expressing PAX3-NCOA2 and PAX3-FOXO1A (forkhead box O1A), respectively. Compared with control cells, PAX3-NCOA2 cells grew faster, were more motile, were less anchorage dependent, progressed more quickly through the G1/S phase of cell cycle and showed greater transcriptional activation of the PAX3 consensus-binding site. However, PAX3-NCOA2 cells proliferated more slowly and differentiated more weakly than did PAX3-FOXO1A cells. Both PAX3-NCOA2 cells and PAX3-FOXO1A cells formed tumors in nude mice, although the PAX3-NCOA2-induced tumors grew more slowly. Our results may explain why NCOA2 rearrangement is mainly found in embryonal rhabdomyosarcoma, which has a better prognosis than alveolar rhabdomyosarcoma, which expresses the PAX3-FOXO1A fusion gene. These results indicate that the PAX3-NCOA2 fusion gene has a dual role in the tumorigenesis of RMS: promotion of the proliferation and inhibition of the myogenic differentiation of RMS cells.