Abstract: Background and Objective: Biological methods by using white-rot fungi is one of the viable alternatives to improve the nutritional value of rice straw. Moreover, biological method is environmental friendly and potentially economic. The objective of this study was to evaluate the effect of utilisation of fungal treated rice straw in the diet of sheep on feed intake and nutrient digestibility when compared to untreated or urea treated rice straw. Materials and Methods: A total of 12 male Phan Rang sheep with body weight (20.58±1.16 kg) were randomly assigned to either a Rice Straw (RS) or a urea treated rice straw (UTR) or fugal treated rice straw (FTR) diet over an experimental period of 20 days in a completely randomized design. The RS diet was a mixture of rice straw, guinea grass and concentrates. In the UTR and the FTR diets, rice straw was replaced by urea treated rice straw and fungal treated rice straw, respectively. During 14 days of adaptation, all sheep were kept in individual pens and received their assigned diets ad libitum. During the following 6 days, the sheep were offered at 95% of ad libitum intake and moved to metabolism crates for total urine and fecal collection to evaluate feed intake, nutrients digestibility and N balance. All data were tested by ANOVA using the general model procedure of SAS. Results: The nutrient intake did not differ among three diets. However, apparent nutrient digestibility were highest (p<0.05) in sheep fed the FTR diet. The nitrogen retention and microbial protein synthesis were also greatest (4.32 and 6.04 g/day, respectively, p<0.05) for sheep fed the FTR diet. Conclusion: These results suggest that using fungal treated rice straw in the diet of sheep showed the best improvement of nutrient digestibility, N retention and microbial protein synthesis.