The fungal denitrification system is composed of copper-containing nitrite reductase (NirK) and a cytochrome P450 nitric oxide (NO) reductase (P450nor) as the minimal components for reducing nitrite to nitrous oxide (N2O). Some fungal systems further contain and utilise dissimilatory (dNar) and assimilatory (aNar) nitrate reductases in order to denitrify nitrate. This system is localised in the mitochondria and functions during anaerobic respiration. Phylogenetic analysis of nirK genes showed that the fungal denitrifying system has the same ancestor as the bacterial counterpart and suggests the possibility of its proto-mitochondrial origin. Denitrifying fungi acquired a P450 from bacteria through horizontal gene transfer and modulated its function to give Nor activity (the origin of P450nor). P450nor receives electrons directly from NADH to reduce NO to N2O. The mechanism of this unprecedented electron transfer has been extensively studied and thoroughly elucidated. Fungal denitrification is often accompanied by a unique phenomenon, co-denitrification, in which a hybrid N2 or N2O species is formed upon the combination of the nitrogen atoms of nitrite with a nitrogen donor (amines and imines). Both NirK and P450nor are potentially involved. The contribution of fungal denitrification and co-denitrification to the nitrogen cycle in nature is also discussed.