In this study geno-toxicity analysis along with effluent treatment was taken up to evaluate the efficiency of biological treatment process for safe disposal of treated effluent. Four fungi were isolated from sediments of pulp and paper mill in which PF4 reduced colour (30%) and lignin content (24%) of the effluent on 3rd day. The fungal strain was identified as Emericella nidulans var. nidulans (anamorph: Aspergillus nidulans) on the basis of rDNA ITS1 and rDNA ITS2 region sequences. The process of decolourization was optimized by Taguchi approach. The optimum conditions were temperature (30-35 degrees C), rpm (125), dextrose (0.25%), tryptone (0.1%), inoculum size (7.5%), pH (5) and duration (24 h). Decolourization of effluent improved by 31% with reduction in colour (66.66%) and lignin (37%) after treatment by fungi in shake flask. Variation in pH from 6 to 5 had most significant effect on decolourization (71%) while variation in temperature from 30 to 35 degrees C had no effect on the process. Treated effluent was further evaluated for geno-toxicity by alkaline single cell gel electrophoresis (SCGE) assay using Saccharomyces cerevisiae MTCC 36 as model organism, indicated 60% reduction. (C) 2009 Elsevier B.V. All rights reserved.