The proto-oncogene Fli-1 is a member of the ets family of transcription factor genes. Its activation by either chromosomal translocation or proviral insertion leads to Ewing's sarcoma in humans or erythroleukemia in mice, respectively. Fli-1 is preferentially expressed in hematopoietic and endothelial cells. This expression pattern resembled that of c-ets-1, another ets gene closely related and physically linked to Fli-1. We also generated a germ line mutation in Fli-1 by homologous recombination in embryonic stem cells. Homozygous mutant mice exhibit thymic hypocellularity which is not related to a defect in a specific subpopulation of thymocytes or to increased apoptosis, suggesting that Fli-1 is an important regulator of a prethymic T- cell progenitor. This thymus phenotype was corrected by crossing the Fli-1- deficient mice with transgenic mice expressing Fli-1 cDNA. Homozygous mutant mice remained susceptible to erythroleukemia induction by Friend murine leukemia virus, although the latency period was significantly increased. Surprisingly, the mutant Fli-1 allele was still a target for Friend murine leukemia virus integration, and leukemic spleens with a rearranged Fli-1 gear expressed a truncated Fli-1 protein that appears to arise from an internal translation initiation site and alternative splicing around the neo cassette used in the gene targeting. The fortuitous discovery of the mutant Fli-1 protein, revealed only as the result of the clonal expansion of leukemic cells harboring a rearranged Fli-1 gene, suggests caution in the interpretation of gene-targeting experiments that result in either no or only a subtle phenotypic alteration.