Xylitol was produced from four indigenous agricultural by-products including sugarcane bagasse, oat hulls, mongbean hulls and peanut hulls through fermentation to evaluate potential of local agricultural wastes for xylitol production. The methodology comprised of hydrolysis followed by detoxification of hydrolysate by neutralization, concentration and charcoal treatment to remove the fermentation inhibitors. The detoxification with calcium hydroxide, five fold concentration of hydrolysate and 5% charcoal treatment at 600C was found to be probable in terms of removal of fermentation inhibitors. The resultant detoxified hydrolysate was fermented with Candida tropicalis and optimum conditions found were at pH 6.0 and temperature 300C. After refining and concentration of fermented broth, the xylitol solution was freeze dried. Highest yield of the xylitol was obtained from oat hulls followed by sugarcane bagasse, mongbean hulls and peanut hulls. The xylitol was replaced in cookies at different ratios for preparation of dietetic food product. The physicochemical, sensory and microbiological characteristics were determined at 0, 15, 30, 45 and 60 days interval. The cookies prepared with 50% replacement of sucrose with xylitol were liked by panelists. The product was found to be acceptable in view of physicochemical and microbiological parameters. Asserted health effects of the xylitol intake were evaluated through biological studies. Xylitol incorporated diet significantly affected serum glucose, cholesterol and triglycerides in normal and diabetic rats.