Hematopoietic stem cells, the critical target cells in chronic myeloid leukemia (CML), are difficult to study owing to their rarity. An in vitro differentiation model was used to examine the role of the Bcr-Abl tyrosine kinase in the pathogenesis of CML. A tetracycline-regulated promoter was developed to drive Bcr-Abl expression in differentiating embryonal stem cells. Enforced Bcr-Abl expression was sufficient to increase the number of multilineage progenitors. Myeloid progenitors were expanded in particular and erythroid development was suppressed, consistent with the phenotype of CML. A complementary approach was used to investigate the effect of specifically blocking Bcr-Abl-deregulated tyrosine kinase activity in transformed cells. For this purpose a fusion "escort/phosphatase" was created that binds to Bcr-Abl and effectively inhibits kinase activity in vitro and in vivo. Loss of function was demonstrated by growth inhibition of bcr-abl-transformed fibroblasts, reacquisition of growth factor dependence by Bcr-Abl-expressing hematopoietic cells, and normalization of erythroid differentiation in a human CML line. These studies reaffirm the central role of stem cell biology in understanding the causes and possible treatments for CML, and suggest that direct targeting and inhibition of Bcr-Abl kinase activity is a valid therapeutic approach to treating this disease.