The chromosomal inversion 16(p13;q22) associated with human acute myeloid leukemia generates the chimeric PEBP2 beta/CBF beta-SMMHC gene. The PEBP2 beta/CBF beta portion of the chimeric polypeptide harbors most of the amino acid sequence of the PEBP2 beta/CBF beta protein, the non-DNA binding subunit of the heterodimeric transcription factor, PEBP2/CBF, whereas the SMMHC portion of the chimera consists of the rod domain of the smooth muscle myosin heavy chain molecule. In this study we examined the subcellular localization of the chimeric protein and its effect both on stress fibers and transcriptional activation by transfecting cDNA into tissue culture cells. The localization of the chimera was investigated by immunocytochemical staining of cells and was found to be both cytoplasmic and nuclear. One aspect of the effect of expression of the chimera was a drastic alteration of cell morphology. The cells appeared elongated and possessed long cytoplasmic processes. Double fluorescent labeling revealed disorganization of the stress fibers and an altered F-actin staining pattern in the transfected cells. Studies using a deletion mutant showed that both the PEBP2 beta/CBF beta and SMMHC domains are necessary for the induction of the morphological alteration. A significant proportion of the chimeric protein was retained in the cytoskeleton after detergent extraction of the cells and could be recuperated as a membrane fraction, suggesting that this is one of the probable sites of action of the PEBP2 beta/CBF beta-SMMHC protein. Another effect of the chimeric protein was inhibition of transcriptional activation dependent on the PEBP2/CBF binding DNA sequence. However, deregulation of PEBP2/CBF site dependent transcription by itself was not sufficient to induce cell morphological changes. Taken together, these results indicate that the PEBP2 beta/CBF beta-SMMHC chimeric protein acts at two levels, at the level of stress fiber organization and at the level of transcriptional activation. We suggest that the action of PEBP2 beta/CBF beta-SMMHC depends to a great extent on whether it is located in the cytoplasm or in the nucleus.