Polycomb group genes (PcGs) have been implicated in cancer based on altered levels of expression observed in certain tumors and the behavior of cultured cells containing inserted PcG transgenes. Endometrial stromal tumors provide evidence for a direct causal relationship because they contain several chromosomal translocations and resultant gene fusions involving PcGs, the most common of which joins portions of the JAZF1 gene to the PcGJJAZ1/SUZ12. We show here that both benign and malignant forms of this tumor have the JAZF1-JJAZ1 fusion but only the malignant form also exhibits exclusion of the unrearranged JJAZ1 allele. To evaluate the effects of both the JJAZ1/SUZ12 fusion and allelic exclusion on functions related to cell growth, we studied HEK293 cells that were modified with respect to JJAZ1 expression. We found that the JAZF1-JJAZ1 fusion restored levels of the polycomb protein EZH2 and histone 3 lysine 27 trimethylation, which were reduced by knockdown of endogenous JJAZ1. At the same time, the presence of JAZF1-JJAZ1 markedly inhibited apoptosis and induced above normal proliferation rates, although the latter effect occurred only when normal JJAZ1 was suppressed. Our findings suggest a genetic pathway for progression of a benign precursor to a sarcoma involving increased cell survival associated with acquisition of a PcG rearrangement, followed by accelerated cellular proliferation upon allelic exclusion of the unrearranged copy of that gene. Furthermore, these results indicate the likely functional importance of allelic exclusion of genes disrupted by chromosomal translocations, as seen in a variety of other cancers.