BACKGROUND: Trichoderma reesei is the main industrial source of cellulases and hemicellulases required for the hydrolysis of biomass to simple sugars, which can then be used in the production of biofuels and biorefineries. The highly productive strains in use today were generated by classical mutagenesis. As byproducts of this procedure, mutants were generated that turned out to be unable to produce cellulases. In order to identify the mutations responsible for this inability, we sequenced the genome of one of these strains, QM9136, and compared it to that of its progenitor T. reesei QM6a. RESULTS: In QM9136, we detected a surprisingly low number of mutagenic events in the promoter and coding regions of genes, i.e. only eight indels and six single nucleotide variants. One of these indels led to a frame-shift in the Zn(2)Cys(6) transcription factor XYR1, the general regulator of cellulase and xylanase expression, and resulted in its C-terminal truncation by 140 amino acids. Retransformation of strain QM9136 with the wild-type xyr1 allele fully recovered the ability to produce cellulases, and is thus the reason for the cellulase-negative phenotype. Introduction of an engineered xyr1 allele containing the truncating point mutation into the moderate producer T. reesei QM9414 rendered this strain also cellulase-negative. The correspondingly truncated XYR1 protein was still able to enter the nucleus, but failed to be expressed over the basal constitutive level. CONCLUSION: The missing 140 C-terminal amino acids of XYR1 are therefore responsible for its previously observed auto-regulation which is essential for cellulases to be expressed. Our data present a working example of the use of genome sequencing leading to a functional explanation of the QM9136 cellulase-negative phenotype.