A new group of darkly pigmented root-infecting fungi was isolated from cereal roots obtained from six different locations in northeastern Germany. Similar random amplified polymorphic DNA(RAPD) patterns and restriction profiles of amplified rDNA were used as a basis for classifying the isolates in a separate group. The isolates demonstrating mycelial and infection characteristics typical of Gaeumannomyces graminis could be differentiated from the varieties of G. graminis as well as from Gaeumannomyces cylindrosporus/Phialophora graminicola using RAPD Polymerase chain reaction (PCR) and rDNA Restriction-fragment length polymorphism (RFLP) analysis. Phylogenetic analysis of the Internal transcribed spacer (ITS) regions suggests that the isolates form a distinct group (named group ‘E’) situated within the Gaeumannomyces–Phialophora complex between the branch of the G. graminis varieties and Gaeumannomyces incrustans/Magnaporthe poae. Isolates of group E produced lobed hyphopodia and were shown in biotests to be non-pathogenic to wheat, oats, Italian Ryegrass and Chewings Fescue, suggesting it is a benign parasite which colonizes cereals or grasses without destroying vascular tissue. Furthermore, curved phialospores could be found. Summarizing the results presented, this new group could be classified as a new species of Phialophora. Although isolates of group E were found at only six of the 32 investigated locations, they composed up to 50% of total isolates of the Gaeumannomyces–Phialophora complex at these sites. Because of the non-pathogenic behaviour, the new group may be of value as biological control agents for pathogenic fungi.