DNA methylation of tumor suppressor genes is a frequent mechanism of transcriptional silencing in cancer. The molecular mechanisms underlying the specificity of methylation are unknown. We report here that the leukemia-promoting PML-RAR fusion protein induces gene hypermethylation and silencing by recruiting DNA methyltransferases to target promoters and that hypermethylation contributes to its leukemogenic potential. Retinoic acid treatment induces promoter demethylation, gene reexpression, and reversion of the transformed phenotype. These results establish a mechanistic link between genetic and epigenetic changes during transformation and suggest that hypermethylation contributes to the early steps of carcinogenesis.