Human serum potently induces hyphal development of the polymorphic fungal pathogen Candida albicans, a phenotype that contributes critically to infections. The fungal adenylyl cyclase Cyr1p is a key component of the cAMP/PKA-signaling pathway that controls diverse infection-related traits, including hyphal morphogenesis. However, identity of the serum hyphal inducer(s) and its fungal sensor remain unknown. Our initial analyses of active serum fractions revealed signs of bacterial peptidoglycan (PGN)-like molecules. Here, we show that several purified and synthetic muramyl dipeptides (MDPs), subunits of PGN, can strongly promote C. albicans hyphal growth. Analogous to PGN recognition by the mammalian sensors Nod1 and Nod2 through their leucine-rich-repeat (LRR) domain, we show that MDPs activate Cyr1p by directly binding to its LRR domain. Given the abundance of PGN in the intestine, a natural habitat and invasion site for C. albicans, our findings have important implications for the mechanisms of infection by this pathogen.