Abstract Despite the high prevalence of ERG transcription factor translocations in prostate cancer, the mechanism of tumorigenicity remains poorly understood. Using lineage tracing, we find the tumor-initiating activity of ERG resides in a subpopulation of murine basal cells that coexpress luminal genes (BasalLum) and not in the larger population of ERG+ luminal cells. Upon ERG activation, BasalLum cells give rise to highly proliferative intermediate (IM) cells with stem-like features that coexpress basal, luminal, hillock and club marker genes, before transitioning to Krt8+ luminal cells. Transcriptomic analysis of ERG+ human prostate cancers confirms the presence of rare ERG+ BasalLum cells, as well as IM cells whose presence is associated with a worse prognosis. Single-cell analysis revealed a chromatin state in ERG+ IM cells enriched for STAT3 transcription factor binding sites and elevated expression of the KMT2A/MLL1 and DOT1L, all three of which are essential for ERG-driven tumorigenicity in vivo. In addition to providing translational opportunities, this work illustrates how single-cell approaches combined with lineage tracing can identify cancer vulnerabilities not evident from bulk analysis.