Many species of Paecilomyces are entomogenous fungi and several are efficacious toward nematodes. To study the potential of Paecilomyces species in controlling nematodes, fungal extracts of 40 Paecilomyces spp. were evaluated for their nematicidal activity against Bursaphelenchus xylophilus and Panagrellus redivivus. The extracts of six Paecilomyces spp. exhibited the nematicidal activity against P. redivivus, and 11 species exhibited the nematicidal activity against B. xylophilus. The methanol extract of strain 1.01761 incubating on Czapek solid medium killed more than 95% P. redivivus in 24 h at 5 mg/ml, and the filtrate of strain 1.01788 cultured in Sabouraud's broth medium resulted in 90% mortality of B. xylophilus in 24 h at 5 mg/ml. A novel nematicidal compound 4-(4'-carboxy-2'-ethyl-hydroxypentyl)-5,6-dihydro-6-methylcyclobuta[b]pyridine-3,6-dicarboxylic acid, was isolated from Paecilomyces sp. YMF1.01761. The LD(50) value of the compound within 24 h against P. redivivus was 50.86 mg/L, against Meloidogyne incognita was 47.1 mg/L, and against B. xylophilus was 167.7 mg/L.