An efficient method for targeted gene inactivation and generation of chromosomal gene fusions in Pasteurella haemolytica has been devised and used to create an lktC::cat operon fusion by allelic exchange at the leukotoxin gene cluster (lktCABD). A copy of the lktC gene was insertionally inactivated by using a nonpolar, promoterless cat cassette and then delivered into P. haemolytica on a shuttle vector. Plasmid incompatibility was used to detect clones where double recombination events had occurred at the chromosomal locus. The insertion in lktC did not affect expression of the downstream genes, and the mutant strain secreted an antigenic proleukotoxin that was neither leukotoxic nor hemolytic. Expression of the lktC gene in trans restored the wild-type phenotype, confirming that LktC is required for activation of the proleukotoxin to the mature leukotoxin. Construction of the lktC::cat operon fusion allowed us to quantitate leukotoxin promoter activity in P. haemolytica and to demonstrate that transcription was maximal during early logarithmic growth phase but was reduced following entry into late logarithmic phase. This allelic exchange system should be useful for future genetic studies in P. haemolytica and could potentially be applied to other members of Haemophilus-Actinobacillus-Pasteurella family, where genetic manipulation is limited.