In graphene, which is an atomic layer of crystalline carbon, two of the distinguishing properties of the material are the charge carriers’ two-dimensional and relativistic character. The first experimental evidence of the two-dimensional nature of graphene came from the observation of a sequence of plateaus in measurements of its transport properties in the presence of an applied magnetic field. These are signatures of the so-called integer quantum Hall effect. However, as a consequence of the relativistic character of the charge carriers, the integer quantum Hall effect observed in graphene is qualitatively different from its semiconductor analogue. As a third distinguishing feature of graphene, it has been conjectured that interactions and correlations should be important in this material, but surprisingly, evidence of collective behaviour in graphene is lacking. In particular, the quintessential collective quantum behaviour in two dimensions, the fractional quantum Hall effect (FQHE), has so far resisted observation in graphene despite intense efforts and theoretical predictions of its existence. Here we report the observation of the FQHE in graphene. Our observations are made possible by using suspended graphene devices probed by two-terminal charge transport measurements. This allows us to isolate the sample from substrate-induced perturbations that usually obscure the effects of interactions in this system and to avoid effects of finite geometry. At low carrier density, we find a field-induced transition to an insulator that competes with the FQHE, allowing its observation only in the highest quality samples. We believe that these results will open the door to the physics of FQHE and other collective behaviour in graphene.