The E26 avian retrovirus causes an acute leukemia in chickens and transforms both myeloid and erythroid cells. The virus encodes a 135 kDa fusion protein which contains amino acid sequences derived from the viral Gag protein and the two cellular transcription factors c-Myb and c-Ets-1p68. Previously we have shown that like v-myb, v-ets on its own is also active in transformation, but only within the erythroid lineage. To understand better the mechanisms involved in the oncogenic activation of c-Ets-1p68, we used the polyoma PEA3 element, a known Ets binding site, to compare the sequence-specific DNA binding and transactivating properties of v-Ets and c-Ets-1p68. Using Ets protein synthesized in rabbit reticulocyte lysate in gel retardation assays, we detected little binding of c-Ets-1p68 to an oligonucleotide containing the PEA3 motif whereas v-Ets bound strongly. However, in transient cotransfection assays in chicken embryo fibroblasts both c-Ets-1p68 and v-Ets transactivated transcription from a heterologous promoter linked to PEA3 elements. Interestingly, fragments of c-Ets-1p68 with strong DNA binding activity could be produced by limited proteolysis, indicating that the DNA binding domain is repressed within the full-length molecule. By deletion mapping the DNA binding domain was localized to the most highly conserved region of the Ets-related proteins known as the ETS domain. The C-terminus as well as a region in the middle of the polypeptide chain are involved in repression of DNA binding in c-Ets-1p68. Significantly, v-Ets contains a 16 amino acid substitution at the C-terminus. Our results suggest that intramolecular repression of DNA binding is a regulatory mechanism in c-Ets-1p68 which is lost in v-Ets.