Hagfish depart so much from other fishes anatomically that they were sometimes considered not fully vertebrate. They may represent: (i) an anatomically primitive outgroup of vertebrates (the morphology-based craniate hypothesis); or (ii) an anatomically degenerate vertebrate lineage sister to lampreys (the molecular-based cyclostome hypothesis). This systematic conundrum has become a prominent case of conflict between morphology- and molecular-based phylogenies. To date, the fossil record has offered few insights to this long-branch problem or the evolutionary history of hagfish in general, because unequivocal fossil members of the group are unknown. Here, we report an unequivocal fossil hagfish from the early Late Cretaceous of Lebanon. The soft tissue anatomy includes key attributes of living hagfish: cartilages of barbels, postcranial position of branchial apparatus, and chemical traces of slime glands. This indicates that the suite of characters unique to living hagfish appeared well before Cretaceous times. This new hagfish prompted a reevaluation of morphological characters for interrelationships among jawless vertebrates. By addressing nonindependence of characters, our phylogenetic analyses recovered hagfish and lampreys in a clade of cyclostomes (congruent with the cyclostome hypothesis) using only morphological data. This new phylogeny places the fossil taxon within the hagfish crown group, and resolved other putative fossil cyclostomes to the stem of either hagfish or lamprey crown groups. These results potentially resolve the morphological-molecular conflict at the base of the Vertebrata. Thus, assessment of character nonindependence may help reconcile morphological and molecular inferences for other major discords in animal phylogeny.