Ewing's family tumors (EFTs) are highly malignant tumors arising from bone and soft tissues that exhibit EWS–FLI1 or variant EWS–ETS gene fusions in more than 85% of the cases. Here we show that CIC, a human homolog of Drosophilacapicua which encodes a high mobility group box transcription factor, is fused to a double homeodomain gene DUX4 as a result of a recurrent chromosomal translocation t(4;19)(q35;q13). This translocation was seen in two cases of soft tissue sarcoma diagnosed as Ewing-like sarcoma. CIC–DUX4 exhibits a transforming potential for NIH 3T3 fibroblasts, and as a consequence of fusion with a C-terminal fragment of DUX4, CIC acquires an enhanced transcriptional activity, suggesting that expression of its downstream targets might be deregulated. Gene expression analysis identified the ETS family genes, ERM/ETV5 and ETV1, as potential targets for the gene product of CIC–DUX4. Indeed, CIC–DUX4 directly binds the ERM promoter by recognizing a novel target sequence and significantly up-regulates its expression. This study clarifies the function of CIC and its role in tumorigenesis, as well as the importance of the PEA3 subclass of ETS family proteins in the development of EFTs arising through mechanisms different from those involving EWS–ETS chimeras. Moreover, the study identifies the role of DUX4 that is closely linked to facioscapulohumeral muscular dystrophy in transcriptional regulation.