Alteration of lineage-specific transcriptional programs for hematopoiesis causes differentiation block and promotes leukemia development. Here, we show that AML1/ETO, the most common translocation fusion product in acute myeloid leukemia (AML), counteracts the activity of retinoic acid (RA), a transcriptional regulator of myelopoiesis. AML1/ETO participates in a protein complex with the RA receptor alpha (RARalpha) at RA regulatory regions on RARbeta2, which is a key RA target gene mediating RA activity/resistance in cells. At these sites, AML1/ETO recruits histone deacetylase, DNA methyltransferase, and DNA-methyl-CpG binding activities that promote a repressed chromatin conformation. The link among AML1/ETO, heterochromatic RARbeta2 repression, RA resistance, and myeloid differentiation block is indicated by the ability of either siRNA-AML1/ETO or the DNA methylation inhibitor 5-azacytidine to revert these epigenetic alterations and to restore RA differentiation response in AML1/ETO blasts. Finally, RARbeta2 is commonly silenced by hypermethylation in primary AML blasts but not in normal hematopoietic precursors, thus suggesting a role for the epigenetic repression of the RA signaling pathway in myeloid leukemogenesis.