Endophytic fungi belonging to the genus Neotyphodium often form symbiotic associations with grasses. The host plants usually benefit from the association with an endophyte. Presence of the symbiont may increase host resistance to infection by some pathogens. However, the exact mechanism of the lower susceptibility of endophyte-infected plants to diseases is still unclear. Growth chamber trials were conducted to determine whether (a) tall fescue plants infected with the endophyte Neotyphodium coenophialum (E+) are more resistant to sheath and leaf spot disease caused by Rhizoctonia zeae than endophyte-free (E−) plants, and (b) R. zeae growth inhibition is associated with endophyte presence. Tall fescue genotypes, each symbiotic with a genetically different native endophyte strain, were inoculated with isolates of R. zeae. The tillers infection by R. zeae, density of endophyte hyphae and content of total phenolic compounds in tillers were studied. Antifungal activity of the N. coenophialum towards R. zeae, Rhizoctonia solani, Bipolaris sorokiniana and Curvularia lunata was also investigated in dual-culture assays. For Tf3, Tf4, TfA2 and TfA9 tall fescue genotypes, the E+ plants had reduced R. zeae infection. In the Tf9 and Tf8085 genotypes, R. zeae infection was similar for both E+ and E− plants. The strongest effect was observed for the Tf4 endophyte. A strongly positive correlation (r = 0.94) occurred between endophyte hyphal density and disease index across all tall fescue genotypes. Dual-culture assays showed no inhibitory interaction between the seven endophyte strains and the R. zeae isolates; however, some endophytes inhibited R. solani, B. sorokiniana and C. lunata. Endophyte presence increased the production of phenolic compounds by the host grasses. The level of phenolics also differed significantly depending on the time of analysis after inoculation of plants by R. zeae. The results indicate that N. coenophialum can suppress disease severity caused by R. zeae infection. The mechanism of higher resistance of E+ plants is likely not based on direct inhibition such as antibiosis or competition. Thus, the induction of specific mechanisms in the host plant, for example, production of phenolic compounds, seems to be the main way of providing resistance to the grass by the endophyte.