In February 2007 an outbreak of Nipah virus (NiV) encephalitis in Thakurgaon District of northwest Bangladesh affected seven people, three of whom died. All subsequent cases developed illness 7–14 days after close physical contact with the index case while he was ill. Cases were more likely than controls to have been in the same room (100% vs. 9·5%, OR undefined, P<0·001) and to have touched him (83% vs. 0%, OR undefined, P<0·001). Although the source of infection for the index case was not identified, 50% of Pteropus bats sampled from near the outbreak area 1 month after the outbreak had antibodies to NiV confirming the presence of the virus in the area. The outbreak was spread by person-to-person transmission. Risk of NiV infection in family caregivers highlights the need for infection control practices to limit transmission of potentially infectious body secretions.