Biological soil crusts of arid and semiarid regions are one of the least explored habitats with respect to the diversity of their fungal communities and the Arabian deserts, in particular, remains mycologically poorly investigated. Here, we investigate the diversity of free-living and lichen-forming fungal communities associated with crusts at two locations in Oman, using intensive cultivation and pyrosequencing, and their role in improving soil stability and hydrology. A total of 226 fungal isolates were recovered and phylogenetic analysis placed 98% of the isolates within the Ascomycota phylum, most of which belonged to Dothideomycetes class and Pleosporales order. The isolates were phylogenetically affiliated to 101 different species within 44 different genera with >55% of the total isolates belonging to Alternaria, Aspergillus, Cladosporium, Cochliobolus, Fusarium, Myrothecium, Phoma and Ulocladium. Using pyrosequencing, a total of 26,998 sequence reads were obtained with Ascomycota, Basidiomycota and Chytridiomycota encompassing >96% of the total sequences. In cyanobacterial crusts, between 67.2 and 70.6% of the total fungal sequences belonged to the classes Dothideomycetes and Eurotiomycetes with the dominance of yeast-like fungi of the genera Sarcinomyces and Aureobasidium. On the other hand, the sequences obtained from the lichen crusts mainly belonged to the classes Lichinomycetes, Lecanoromycetes and Eurotiomycetes. Among the identified lichens were Placidium lacinulatum, Psora decipiens, Peccania fontqueriana, Stromatella bermudana, Verrucaria chiloensis, Pecania arizonica, Lempholemma polyanthes and Lichinella cribellifera. Although detected fungi confirmed earlier trends in fungal diversity in other deserts, quite a number of isolates and sequences representing novel taxa were recovered. The presence of lichen in crusts improved their resistance to erosion and increased their water holding capacity. We conclude that desert crusts of Oman harbor a large diversity of fungal communities that varies with crust type and desert ecoregions, and the presence of lichens in these crusts improves soil characteristics. Keywords: Biological soil crusts Fungi Lichens Pyrosequencing Cultivation Erosion Water-holding capacity.