Calocybe gambosa (Fr.) Donk is an edible mushroom, highly appreciated especially in Italy. It forms fairy rings (FRs) characterized by a zone of dead vegetation corresponding to the underground-extending mycelial front, followed by a “greener belt” where vegetation is thriving. To better understand this particular phenomenon, the effect of C. gambosa mycelium on plants were studied both in situ, across different zones of FRs (external area—EX, fungal front—FF, greener belt—GB, internal area—IN) of three fairy rings, and ex situ on Poa trivialis L. Plant community analysis revealed significant changes in plant species composition across the zones, characterized by a decline in diversity and a vegetation shift, from dicotyledons to monocotyledons, progressing from the EX toward the IN, where vegetation gradually begins to reestablish its original composition. Molecular and morphological analyses showed the endophytic colonization of C. gambosa mycelium within the herbaceous plants growing at the FF. Ex situ studies indicated pathogenic behavior of C. gambosa. After root colonization, it caused growth reduction in P. trivialis plants (79% reduction in root length, 76% reduction in leaf length), leaf yellowing, decreased photosynthetic pigments, and root necrosis. The cellulase (endo-1,4-β-glucanase), xylanase, polygalacturonase, and polymethylgalacturonase enzymatic activities of C. gambosa support its pathogenic effects. Conversely, volatile organic compounds (VOCs) produced by C. gambosa mycelium stimulated shoot development in P. trivialis (17% increase in shoot length), which accounts for the formation of the flourishing vegetation zone behind the FF. In contrast, soluble substances produced by C. gambosa mycelium did not affect the growth of P. trivialis. Our results suggest that C. gambosa plays a dual ecological role in regulating plant community dynamics within FRs: it acts as a pathogen by colonizing herbaceous plant roots and, at the same time, promotes vegetation growth through VOC production.