Small GTP-binding proteins of the highly conserved Rho family act as molecular switches regulating cell signalling, cytoskeletal organization and vesicle trafficking in eukaryotic cells. Here we show that in the dimorphic plant pathogenic fungus Ustilago maydis deletion of either cdc42 or rac1 results in loss of virulence but does not interfere with viability. Cells deleted for cdc42 display a cell separation defect during budding. We have previously shown that the Rho-specific guanine nucleotide exchange factor (GEF) Don1 is required for cell separation in U. maydis. Expression of constitutive active Cdc42 rescues the phenotype of don1 mutant cells indicating that Don1 triggers cell separation by activating Cdc42. Deletion of rac1 affects cellular morphology and interferes with hyphal growth, whereas overexpression of wild-type Rac1 induces filament formation in haploid cells. This indicates that Rac1 is both necessary and sufficient for the dimorphic switch from budding to hyphal growth. Cdc42 and Rac1 share at least one common essential function because depletion of both Rac1 and Cdc42 is lethal. Expression of constitutively active Rac1(Q61L) is lethal and results in swollen cells with a large vacuole. The morphological phenotype, but not lethality is suppressed in cla4 mutant cells suggesting that the PAK family kinase Cla4 acts as a downstream effector of Rac1.