Foamy viruses (FVs) are highly fusogenic, and their replication induces massive syncytium formation in infected cell cultures which is believed to be mediated by expression of the envelope (Env) protein. The FV Env is essential for virus particle egress. The unusually long putative membrane-spanning domain (MSD) of the transmembrane subunit carries dispersed charged amino acids and has an important function for particle envelopment. To better understand the capsid-envelope interaction and Env-mediated cell fusion, we generated a variety of FV MSD mutations. C-terminal deletions revealed the cytoplasmic domain to be dispensable but the full-length MSD to be required for fusogenic activity. The N-terminal 15 amino acids of the MSD were found to be sufficient for membrane anchorage and promotion of FV particle release. Expression of wild-type Env protein rarely induced syncytia due to intracellular retention. Coexpression with FV Gag-Pol resulted in particle export and a dramatic increase in fusion activity. A nonconservative mutation of K(959) in the middle of the putative MSD resulted in increased fusogenic activity of Env in the absence of Gag-Pol due to enhanced cell surface expression as well as structural changes in the mutant proteins. Coexpression with Gag-Pol resulted in a further increase in the fusion activity of mutant FV Env proteins. Our results suggest that an interaction between the viral capsid and Env is required for FV-induced giant-cell formation and that the positive charge in the MSD is an important determinant controlling intracellular transport and fusogenic activity of the FV Env protein.