Members of the Cladonia gracilis group of lichen fungi are common terrestrial lichens where morphological features are more similar between members of the C. gracilis species complex and allied species outside the complex than they are between subspecies within the complex. The objectives of this study were to examine whether the Cladonia gracilis species complex is monophyletic, to determine whether morphological similarity is supported by genetic variation, and to examine the utility of the polyketide synthase (PKS) gene for phylogenetic studies among closely related species. Two loci, the ketosynthase region of the PKS gene and the internal transcribed spacer (ITS) region of nuclear ribosomal DNA, were sequenced and analysed by Maximum Parsimony, Bayesian and haplotype network analyses. Functional differences were also inferred through ITS2 RNA secondary structures and non-synonymous changes in translated PKS amino acid sequences. The monophyly of the C. gracilis complex is supported by 71% bootstrap in the ITS phylogeny, and 92% bootstrap with greater than 95% posterior probability in the PKS phylogeny. Morphological similarity is not always supported by genetic similarity. The PKS gene is less variable than the ITS but the PKS supports species hypotheses that are reflected in the ITS2 RNA model. We conclude that monophyly of the C. gracilis complex can be supported if C. cornuta, C. coniocraea and C. ochrochlora are included in the complex. In addition, C. maxima, C. phyllophora and C. subchordalis are supported as monophyletic species outside the C. gracilis complex. Cladonia maxima may form a separate species and variation among podetial morphology may be explained by convergent evolution.