Abstract: The role of phytoplankton allelopathy in promoting community diversity was suggested by several theoretical studies. However, an experimental demonstration of the principle was missing. Previous work from our research group demonstrated in an experimental two-species system the principle that allelopathy can promote phytoplankton coexistence, against predictions of classical resource competition theory. However, the dynamics of the chemical compounds involved and their relation with resource availability were unknown, hence, we lacked a full description of the mechanism. The aim of the present work was to unveil the mechanism through which allelopathy drives the species dynamics in this system. Our approach was to run long-term experiments of interspecific competition for a single limiting resource. In these experiments we measured directly (by chemical analysis) and indirectly (by bioassay) the concentrations of the allelopathic compounds involved in this interaction. These compounds are portoamides, four kinds of small cyclic peptides. Simultaneously, it was measured the concentration of inorganic nitrate (the limiting resource of the system) which we suspected to be closely linked to allelochemical production. In order to better support our conclusions, we constructed a mechanistic model of two species interspecific competition which included explicitly the mechanisms of nitrate competition and allelopathy. Our results show that allelopathy drives species dynamics by a bottom-up mechanism in which nitrate availability regulates allelochemical production, which shows a non-linear relationship with death of the sensitive species. The population dynamic experiments and model analysis showed that species coexistence (either stable or oscillatory) driven by allelopathy is the most likely outcome of interspecific competition in this system. After classical works on interspecific competition for nutrients and light, our results constitute the first description of a biological mechanism that promotes species diversity in phytoplankton, which will contribute to a better understanding of plankton diversity and dynamics.