Bacillus sp. associated with an entomopathogenic nematode is shown to produce diketopiperazine (DKP) that showed stronger antifungal activity against Colletotrichum gloeosporioides [minimum inhibitory concentration (MIC): 8 mug mL(- 1)] than commercial fungicide oligochitosan (MIC: 125 mug mL(- 1)). DKP identified as cyclo(D-Tyr-L-Leu) was isolated for the first time from a natural source with a d-tyrosine residue. This report also demonstrates for the first time an antifungal property exploration of cyclo(Tyr-Leu) class of dipeptides. The structural elucidation was carried out using 1D, 2D NMR methods and HPLC.