Aims Tea tree oil (TTO) has been confirmed in previous study as a potential natural antifungal agent to control Botrytis cinerea and grey mould in fresh fruit. However, the mechanism of its action has not been clearly revealed, and some hypotheses mainly depended on the results obtained from the bacterial test. For the antifungal mechanism, the effect of TTO on the mycelium morphology and ultrastructure, cell wall and membrane, and membrane fatty acid composition of B. cinerea was investigated in vitro experiments. Methods and Results Tea tree oil in vapour or contact phase exhibited higher activity against the mycelial growth of B. cinerea. Observations using scanning electron microscope and transmission electron microscope revealed that the mycelial morphology and ultrastructure alternations caused by TTO are the markedly shriveled or flatted empty hyphae, with thick cell walls, ruptured plasmalemma and cytoplasmic coagulation or leakage. Furthermore, TTO caused significantly higher alkaline phosphatase activity after 4‐h treatment and markedly higher absorbance at 260 nm and electric conductivity in the external hyphae of fungi after 16‐h treatment. Moreover, decreased unsaturated/saturated fatty acid ratio of the fungal membrane was also observed after TTO treatment. Conclusions The methodology used in this study confirmed that the cell wall destroyed firstly in the presence of TTO, and then the membrane fatty acid composition changed, which resulted in the increasing of membrane permeability and releasing of cellular material. The above findings may be the main reason for TTO's antifungal ability to B. cinerea. Significance and Impact of the Study Understanding the mechanism of TTO antifungal action to B. cinerea is helpful for its commercial application on the preservation of fresh fruit and vegetables.