Fuel ethanol production from lignocellulosic materials is at a level where commercial biofuel production is becoming a reality. The solubilization of the hemicellulose fraction in lignocellulosic-based feedstocks results in a large variety of sugar mixtures including xylose. However, allowing xylose fermentation in yeast that normally is used for fuel ethanol production requires genetic engineering. Moreover, the efficiency of lignocellulosic pretreatment, together with the release and generation of inhibitory compounds in this step, are some of the new challenges faced during second generation ethanol production. Successful advances in all these aspects will improve ethanol yield, productivity and titer, which will reduce the impact on capital and operating costs, leading to the consolidation of the fermentation of lignocellulosic biomass as an economically feasible option for the production of renewable fuels. Therefore the development of yeast strains capable of fermenting a wide variety of sugars in a highly inhibitory environment, while maintaining a high ethanol yield and production rate, is required. This review provides an overview of the current status in the use of xylose-engineered yeast strains and describes the remaining challenges to achieve an efficient deployment of lignocellulosic-based ethanol production.