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The present study is aimed at enhancing the skin penetration of ketoconazole by formulating it as transethosome. Ketoconazole-loaded transethosome formulations were prepared by conventional thin film evaporation and hydration method and were optimized using concentration of edge activator (span 80), ethanol and sonication time as factors and particle size, polydispersity index and entrapment efficiency as responses. The optimized formulation was further evaluated for in vitro diffusion, anti-fungal activity, ex vivo penetration and in vivo pharmacodynamic activity. The results of in vitro drug diffusion and ex vivo skin penetration studies demonstrated that the amount of drug diffused and penetrated through the skin was increased. Optimized transethosomes showed enhanced in vitro antifungal and in vivo pharmacodynamic activities against Candida albicans in Wistar albino rats when compared to conventional liposomes. Therefore, the developed ketoconazole encapsulated transethosome formulation is capable of enhancing the skin penetration of the drug by overcoming the stratum corneum barrier function and acting as an effective drug delivery system for ketoconazole through the skin for its anti-fungal activity.