DNA methylation is a common epigenetic signaling mechanism associated with silencing of repeated DNA and transcriptional regulation in eukaryotes. Here we report that DNA methylation in the human fungal pathogen Candida albicans is primarily localized within structural genes and modulates transcriptional activity. Major repeat sequences and multigene families are largely free of DNA methylation. Among the genes subject to DNA methylation are those associated with dimorphic transition between yeast and hyphal forms, switching between white and opaque cells, and iron metabolism. Transcriptionally repressed methylated loci showed increased frequency of C-to-T transitions during asexual growth, an evolutionarily stable pattern of repression associated mutation that could bring about genetic alterations under changing environmental or host conditions. Dynamic differential DNA methylation of structural genes may be one factor contributing to morphological plasticity that is cued by nutrition and host interaction.