Avian oncogenic retrovirus MH2 carries two cell-derived oncogenes, v-mil and v-myc. From an infectious stock of MH2 a spontaneous deletion mutant, MH2D12, that has lost most of the v-mil gene but has retained a complete and functional v-myc gene, has been isolated. Nonproducer quail embryo cells transformed by MH2D12 in the absence of helper virus contain two virus-specific proteins: a gag-related protein of 53,000 Da (p53gag), and a v-myc gene product of 59,000/61,000 Da (p59/61v-myc) indistinguishable from the v-myc protein encoded by MH2. MH2D12 viral RNA contains all T1-oligonucleotides specific for the MH2 v-myc gene but none of those characteristic for the v-mil gene. The genetic structure of molecularly cloned proviral DNA of MH2D12 was revealed by restriction mapping, blot hybridization, heteroduplex analysis, and nucleotide sequencing. The MH2D12 provirus is homologous to the MH2 genome but has suffered a deletion of 1271 nucleotides from the central region encompassing the 3' end of delta gag and all of v-mil except the very 3' 31 nucleotides directly adjacent to the v-myc gene. A nine-nucleotide overlap of homology to gag or mil at the delta gag/delta mil junction suggests that recombination between homologous sequence elements of the delta gag and v-mil domains of MH2 was involved in the genesis of MH2D12. The nucleotide sequence analysis predicts that the carboxyterminal 17 amino acids of p53gag are encoded by the residual v-mil sequences and by intron-derived v-myc sequences. Transformation of quail embryo cells by MH2D12 can be assayed by focus and colony formation of transformed cells. This indicates that the v-mil gene is not essential for these activities. However, size and morphology of foci and colonies, and cellular morphology of cultured MH2D12-transformed cell lines can easily be distinguished from those observed in cell transformation by MH2 and resemble more those seen in cell transformation by viruses containing the myc oncogene only.