A two‐dimensional (2D) locally one‐dimensional finite‐difference time‐domain (LOD‐FDTD) method with low numerical dispersion is introduced by virtue of a parameter‐optimized compact fourth‐order scheme. The numerical dispersion error and anisotropy of numerical phase velocity of this new method are proven to be significantly reduced compared with the original second‐order method. © 2008 Wiley Periodicals, Inc. Microwave Opt Technol Lett 50: 2783–2787, 2008; Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/mop.23842