AbstractIn this article, we introduce a new type of Characteristic Basis Finite Element Method (CBFEM), which is based on the concepts of Physical Optics (PO) and Perfectly Matched Layers (PMLs), for solving large‐scale electromagnetic scattering problems in a rigorous and efficient manner. This parallel and iteration‐free technique, called CBFEM‐PO, decomposes the computational domain into a number of subdomains, and generates three types of characteristic basis functions (CBFs) that are specially‐tailored to each individual subdomain. Of these, the first two types of CBFs are comprised of primary and secondary bases arising from the self‐interactions in each subdomain and mutual‐couplings between different subdomains, respectively. They are obtained by solving the localized problem in each subdomain, isolated by PML regions. The third‐type of CBFs are derived by using the PO fields for different incident angles, polarization, and frequency. Two important salutary features of the proposed technique are: considerable reduction in the matrix size, which makes it feasible to use direct solvers; and convenient parallelizability that enables us to decrease the overall computation time by utilizing parallel platforms. We present a number of representative examples to illustrate the versatility of the method in solving 3D electromagnetic scattering problems. © 2010 Wiley Periodicals, Inc. Microwave Opt Technol Lett 52: 1053–1060, 2010; Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/mop.25134