A mushroom themed biome found to the west of the Coal Pits and all around the Underground Jungle.
About
The Fungal Caverns, as it appears very early in the game, can be a very lucrative place to visit as it contains much higher tiered wands than can normally be obtained in the Coal Pits. This comes at great risk, however, as the caverns are littered with mid- and late-game enemies like, among others, Turso, Pikkuturso and the lethal Robottikyttä.
The caves themselves are riddled with tight passages, often lined with steel beams that restrict movement and prevent easy digging. Rooms can be completely sealed shut, so without explosives you may find it hard to reach many areas. Growths of fungus are prevalent everywhere, and eating them will cause a wavy colorful effect and distort the music but otherwise have no effect.
The Fungal Cavern section to the west of the Underground Jungle actually connects to The Vault beneath it, providing a means to climb back up a level should you wish to do so.