In February 2007 an outbreak of Nipah virus (NiV) encephalitis in Thakurgaon District of northwest Bangladesh affected seven people, three of whom died. All subsequent cases developed illness 7-14 days after close physical contact with the index case while he was ill. Cases were more likely than controls to have been in the same room (100% vs. 9.5%, OR undefined, P<0.001) and to have touched him (83% vs. 0%, OR undefined, P<0.001). Although the source of infection for the index case was not identified, 50% of Pteropus bats sampled from near the outbreak area 1 month after the outbreak had antibodies to NiV confirming the presence of the virus in the area. The outbreak was spread by person-to-person transmission. Risk of NiV infection in family caregivers highlights the need for infection control practices to limit transmission of potentially infectious body secretions.