Aims To purify and characterize antimicrobial compounds from Bacillus sp. strain N associated with rhabditid entomopathogenic nematode (EPN). Methods and Results The cell-free culture filtrate of a bacterium associated with an EPN, Rhabditis (Oscheius) sp., exhibited strong antimicrobial activity. The ethyl acetate extract of the bacterial culture filtrate was purified by silica gel column chromatography to obtain three diketopiperazines (DKPs). The structure and absolute stereochemistry of this compound were determined based on extensive spectroscopic analyses (FABMS, 1H NMR, 13C NMR, 1H-1H COSY, 1H-13C HMBC) and Marfey's method. The compounds were identified as cyclo(l-Pro-l-Leu), cyclo(d-Pro-l-Leu) and cyclo(d-Pro-l-Tyr), respectively. Three DKPs were active against all the five fungi tested (Aspergillus flavus, Candida albicans, Fusarium oxysporum, Rhizoctonia solani and Penicillium expansum) and are more effective than the standard fungicide bavistin. The highest activity of 4 mu g ml-1 by cyclo(l-Pro-l-Leu) and cyclo(d-Pro-l-Tyr) was recorded against P. expansum, a plant pathogen responsible for causing postharvest decay of stored apples and oranges. Cyclo(d-Pro-l-Leu) recorded good antibacterial activity against all the four bacteria tested (Bacillus subtilis, Staphylococcus aureus, Escherichia coli and Pseudomonas aeruginosa), and cyclo(l-Pro-l-Leu) and cyclo(d-Pro-l-Tyr) recorded good activity only against Gram-positive bacteria. To our knowledge, this is the first report of antifungal activity of the DKPs against the plant pathogenic fungi F. oxysporum, R. solani and P. expansum. The production of cyclo(l-Pro-l-Leu), cyclo(d-Pro-l-Leu) and cyclo-(d-Pro-l-Tyr) by a bacterium associated with EPN is also reported here for the first time. Conclusions Isolated DKPs demonstrated high antimicrobial activity against bacteria and fungi, especially against plant pathogenic fungi. We conclude that the bacterium associated with EPN is a promising source of natural bioactive secondary metabolites which may receive great benefit in the field of agriculture. Significance and Impact of the Study This study is a significant contribution to the knowledge of compounds unique from EPN bacteria as potential sources of new drugs in the agricultural and pharmacological industry.