A tree fungus could provide green fuel that can be pumped directly into vehicle tanks, US scientists say. The organism, found in the Patagonian rainforest, naturally produces a mixture of chemicals that is remarkably similar to diesel.

"This is the only organism that has ever been shown to produce such an important combination of fuel substances," said Gary Strobel, a plant scientist from Montana State University, who led the work. "We were totally surprised to learn that it was making a plethora of hydrocarbons."

In principle, biofuels are attractive replacements for liquid fossil fuels used in transport that generate greenhouse gases. The European Union has set biofuel targets of 5.75% by 2010 and 10% by 2020. But critics say current biofuels scarcely reduce greenhouse gas emissions and cause food price rises and deforestation. Producing biofuels sustainably is now a target and this latest work has been greeted by experts as an encouraging step.

The fungus, called Gliocladium roseum and discovered growing inside the ulmo tree (Eucryphia cordifolia) in northern Patagonia, produces a range of hydrocarbon molecules that are virtually identical to the fuel-grade compounds in existing fossil fuels. Details of the concoction, which Strobel calls "mycodiesel", will be published in the November issue of the journal Microbiology. "The results were totally unexpected and very exciting and almost every hair on my arms stood on end," said Strobel.

Many simple organisms, such as algae, are known to make chemicals that are similar to the hydrocarbons present in transport fuel but, according to Strobel, none produce the explosive high energy density found in this fungus. Strobel said that the chemical mixture produced could be used in a modern diesel engine without any modification. Another advantage of the fungus is its ability to eat up cellulose, the compound that makes up much of the organic waste that is currently discarded, such as stalks and sawdust. Converting this plant waste into fuels is an important goal for the biofuel industry, which currently uses food crops such as corn.

"Fungi are very important but we often overlook these organisms," said Tariq Butt, a fungus expert at Swansea University. "The discovery and its potential applications are fantastic. However, more research is needed, as well as a pilot study to determine the costs and benefits." John Loughhead, executive director of the UK Energy Research Centre, also welcomed the "encouraging" discovery but noted it was at its earliest stage of development.