The endophytic fungi, Pestalotiopsis versicolor and Pestalotiopsis neglecta, were isolated from the healthy leaves and bark of the Japanese Yew tree, Taxus cuspidata. The fungal species were identified by their characteristic culture morphology and molecular analysis. For the first time, the test fungi were screened for the production of taxol in modified liquid medium. The presence of taxol was confirmed by HPLC, H-1 NMR, and LC-MS methods of analysis. The maximum amount of taxol production in P. versicolor was recorded as 478 mu g/l. The production rate was increased to 9560-fold than that found in the culture broth of earlier reported fungus, Taxomyces andreanae. The extracted fungal taxol showed a strong cytotoxic activity in the in vitro culture of tested human cancer cells by apoptotic assay indicating that the increase in taxol concentration induces increased cell death. A PCR-based screening for ts, a unique gene in the formation of the taxane skeleton, confirmed the molecular blueprint for taxol biosynthesis. The results designate that the fungal endophyte, P. versicolor, is an excellent candidate for an alternate source of taxol supply and can also serve as a potential species for genetic engineering to enhance the production of taxol to a higher level. (C) 2010, The Society for Biotechnology, Japan. All rights reserved.