"This is the only organism that has ever been shown to produce such an important combination of fuel substances," said Montana State University Professor Gary Strobel, making it a better source of biofuels than anything used now.

The fungus, Gliocladium roseum, produces various molecules made of hydrogen and carbon that are found in diesel, the researchers said. Because of that, the fuel it produces is called "myco-diesel."

"Gliocladium roseum lives inside the Ulmo tree in the Patagonian rainforest," Strobel said. "We were trying to discover totally novel fungi in this tree by exposing its tissues to the volatile antibiotics of the fungus Muscodor albus. Quite unexpectedly, G. roseum grew in the presence of these gases when almost all other fungi were killed.

"It was also making volatile antibiotics. Then when we examined the gas composition of G. roseum, we were totally surprised to learn it was making a plethora of hydrocarbons and hydrocarbon derivatives," Strobel said."

Strobel said the discovery brings into question scientists' knowledge of the way fossil fuels are made.

The discovery is reported in the journal Microbiology.