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.