BACKGROUND: Liposarcomas are the most common class of soft tissue sarcomas, and myxoid liposarcoma is the second most common liposarcoma. EWSR1-DDIT3 is a chimeric fusion protein generated by the myxoid liposarcoma-specific chromosomal translocation t(12;22)(q13;q12). Current studies indicate that multipotent mesenchymal cells are the origin of sarcomas. The mechanism whereby EWSR1-DDIT3 contributes to the phenotypic selection of target cells during oncogenic transformation remains to be elucidated. METHODOLOGY/PRINCIPAL FINDINGS: Reporter assays showed that the EWSR1-DDIT3 myxoid liposarcoma fusion protein, but not its wild-type counterparts EWSR1 and DDIT3, selectively repressed the transcriptional activity of cell lineage-specific marker genes in multipotent mesenchymal C3H10T1/2 cells. Specifically, the osteoblastic marker Opn promoter and chondrocytic marker Col11a2 promoter were repressed, while the adipocytic marker Ppar-?2 promoter was not affected. Mutation analyses, transient ChIP assays, and treatment of cells with trichostatin A (a potent inhibitor of histone deacetylases) or 5-Aza-2'-deoxycytidine (a methylation-resistant cytosine homolog) revealed the possible molecular mechanisms underlying the above-mentioned selective transcriptional repression. The first is a genetic action of the EWSR1-DDIT3 fusion protein, which results in binding to the functional C/EBP site within Opn and Col11a2 promoters through interaction of its DNA-binding domain and subsequent interference with endogenous C/EBPß function. Another possible mechanism is an epigenetic action of EWSR1-DDIT3, which enhances histone deacetylation, DNA methylation, and histone H3K9 trimethylation at the transcriptional repression site. We hypothesize that EWSR1-DDIT3-mediated transcriptional regulation may modulate the target cell lineage through target gene-specific genetic and epigenetic conversions. CONCLUSIONS/SIGNIFICANCE: This study elucidates the molecular mechanisms underlying EWSR1-DDIT3 fusion protein-mediated phenotypic selection of putative target multipotent mesenchymal cells during myxoid liposarcoma development. A better understanding of this process is fundamental to the elucidation of possible direct lineage reprogramming in oncogenic sarcoma transformation mediated by fusion proteins.