Streptomyces scabies is the best studied of those streptomycetes that cause an economically important disease known as potato scab. The phytotoxin thaxtomin is made exclusively by these pathogens and is required for virulence. Here we describe regulation of thaxtomin biosynthesis by TxtR, a member of the AraC/XylS family of transcriptional regulators. The txtR gene is imbedded in the thaxtomin biosynthetic pathway and is located on a conserved pathogenicity island in S. scabies, S. turgidiscabies and S. acidiscabies. Thaxtomin biosynthesis was abolished and virulence was almost eliminated in the txtR deletion mutant of S. scabies 87.22. Accumulation of thaxtomin biosynthetic gene (txtA, txtB, txtC, nos) transcripts was reduced compared with the wild-type S. scabies 87.22. NOS-dependent nitric oxide production by S. scabies was also reduced in the mutant. The TxtR protein bound cellobiose, an inducer of thaxtomin production, and transcription of txtR and thaxtomin biosynthetic genes was upregulated in response to cellobiose. TxtR is the first example of an AraC/XylS family protein regulated by cellobiose. Together, these data suggest that cellobiose, the smallest oligomer of cellulose, may signal the availability of expanding plant tissue, which is the site of action of thaxtomin.