This study was aimed at isolation and characterization of natural antifungal compounds for grain mold, a key parasitic fungal disease of sorghum. Pseudomonas fluorescens strain isolated from rhizosphere of groundnut crop was selected as a source. Its biocontrolling ability was assessed by testing some biochemical attributes such as phosphate-solubilization, and HCN, NH3 , indole-3-acetic acid, and siderophore production. The strain showed positive result for all except indole-3-acetic acid, revealing its suitability for a further study. The antibiotic-sensitivity pattern of the strain against 43 antibiotics was also established, which showed resistance to 15 antibiotics. The efficacy of P. fluorescens strain against grain mold was identified by dual culture technique. Hundred percent inhibition was found against Fusarium moniliforme, an important causative agent of this disease. The strain was fermented for secondary metabolites and extracted with AcOEt. Chromatographic separation of the extract yielded four known compounds, cyclo(l-Pro-l-Phe) (1), cyclo(trans-4-hydroxy-l-Pro-l-Leu) (2), cyclo(trans-4-hydroxy-l- Pro-l-Phe) (3), and cyclo(Gly-l-Pro) (4), which were characterized by spectral analysis and optical rotation. The crude extract, a mixture of 2 and 3, and isolated 1 were proved to be significantly effective against grain mold fungi. This is the first report on production of these cyclic dipeptides by P. fluorescens and their antagonistic properties.