A new Panaeolus species was collected on a lawn at the Kunming Institute of Botany, Chinese Academy of Sciences in Southwest China and subjected to morphological and molecular analyses. Both macro- and micro-morphological features of the new species were described and compared with morphologically similar species in Panaeolus. The pileus has a distinctive reddish brown patch at the center. Phylogenetic analysis of nrITS data showed a distinct placement of the new species among the closest Panaeolus species, i.e. Panaeolus cyanescens (Berk & Broome) Sacc., Panaeolus cambodginiensis Ola’h & R. Heim, Panaeolus bisporus (Malençon & Bertault) Ew. Gerhardt and Panaeolus cyanescens var. bisporus (Malençon & Bertault) G. Moreno & Esteve-Rav. Both morphological features and phylogenetic data supported naming our taxon as a distinct new species in Panaeolus. Color photographs of basidiomata and micromorphological structures, a full description of the new species, and an updated phylogenetic tree to show the placement of the new species are provided.