Penicillium strain (DLR-7) producing red extracellular pigment was isolated from the mangrove soils of Andhra Pradesh, India. A multifactorial and step-wise experiment was designed to study the physical and nutritional conditions that favor red pigment and biomass production. Potato extract prepared in the laboratory produced more pigment than the commercial potato dextrose broth and was therefore used as the basal medium. Culture conditions such as xylose 2% (w/v), glycine 1% (w/v), pH and temperature of 3.0 and 25 ˚C, were observed to be the optimal conditions producing 1050 mg/L of red pigment and 3.1 g/L of mycelia biomass. At pH 2.0, yellow fluorescent pigment was observed instead of red and spores were completely absent. Pigment was not produced when basic amino acids like arginine or lysine were supplemented to the medium, but acidic amino acids such as aspartic acid and glutamic acid enhanced pigment production. Also simple amino acids such as glucose maximized the growth of fungus whereas, amino acids such as xylose, mannose and glycine stimulated pigment yield. Therefore, this study demonstrates the significance of carbon-nitrogen combination in pigment production. Several other interesting observations from this study have been discussed in this paper.