Chitosan, a cationic polysaccharide, has been widely used as a dietary supplement and in a variety of pharmacological and biomedical applications. The antifungal activity and mechanism of action of low molecular weight water-soluble chitosan (LMWS-chitosan) were studied in fungal cells and vesicles containing various compositions of fungal lipids. LMWS-chitosan showed strong antifungal activity against various pathogenic yeasts and hyphae-forming fungi but no hemolytic activity or cytotoxicity against mammalian cells. The degree of calcein leakage was assessed on the basis of lipid composition (PC/CH; 10:1, w/w). Our result showing that LMWS-chitosan interacts with liposomes demonstrated that chitosan induces leakage from zwitterionic lipid vesicles. Confocal microscopy revealed that LMWS-chitosan was located in the plasma membrane. Finally, scanning electron microscopy revealed that LMWS-chitosan causes significant morphological changes on fungal surfaces. Its potent antibiotic activity suggests that LMWS-chitosan is an excellent candidate as a lead compound for the development of novel anti-infective agents.