The transcription factor Stat5 mediates the cellular response to activation of multiple cytokine receptors involved in the regulation of proliferation and differentiation of hematopoietic cells. Recently, the human Stat5 gene was found to be translocated to the RARalpha gene in a patient with acute promyelocytic leukemia indicating that Stat5 might also play a role in cellular transformation. We investigated the mechanism by which Stat5 might exert this function and studied the biochemical and cellular functions of fusion proteins comprising Stat5 and RARalpha. The expression of Stat5-RARalpha causes the transcriptional repression of gene transcription, a process that requires the coiled-coil domain of Stat5 (amino acid positions 133-333). Oligomerization of this domain in the Stat5-RARalpha fusion protein leads to stable binding of the corepressor SMRT independent of all-trans retinoic acid (ATRA) stimulation and is accompanied by an impaired response to differentiation signals in hematopoietic cells. This inhibitory effect on myeloid differentiation cannot be overcome by simultaneous coexpression of RARalpha. We conclude that Stat5 is capable of interacting with a corepressor complex that alters the pattern of corepressor binding to RARalpha and its dissociation in response to ATRA stimulation, leading to enhanced repressor activity and a block of hematopoietic differentiation.