Psathyrella is the archetypal little brown mushroom genus with few easily discernable characters causing it to be considered a "clean-up" genus for other small brown-spored saprotrophic species found worldwide. While molecular studies have demonstrated that mushroom genera based on homoplastic morphological characters are artificial, the degree of phylogenetic heterogeneity contained within Psathyrella and Psathyrellaceae has never been appropriately addressed. For this study, 132 ribosomal sequences from approximately one-tenth of the known Psathyrella species worldwide, including representatives of most subgeneric subdivisions, and three closely related coprinoid genera (Parasola, Coprinopsis, Coprinellus) were evaluated using multiple phylogenetic methods, including likelihood, with Agaricaceae as the outgroup. Our results indicated that Psathyrella was polyphyletic. Conservatively, the genus can be separated into 11 clades of which five can be raised to generic status. Most species of Psathyrella, including its type species P. gracilis, formed a large clade with Coprinellus, which appeared to be derived from within Psathyrella. Generic limits of Parasola, Lacrymaria, and Coprinopsis should be reevaluated. Several taxa previously synonymized based on morphological features were phylogenetically distinct. Morphological features traditionally used to subdivide Psathyrella appeared to be mostly convergent (homoplasious) when traced upon the resulting phylogenies, although several had high RI values. These results were interpreted in light of the two major taxonomic treatments of Psathyrella and revealed substantial inconsistencies between the molecular- and morphology-derived inferences of relationships.