Samples of the composition RE x Co20 Cu80-x , RE = Sm, Gd or Dy (x = 0, 1, and 3) were produced by melt-spinning and subsequent annealing. The magnetoresistance is negative as in granular Co-Cu, but its values depend on the kind of rare earth element added and on changes in the microstructure induced by thermal annealing. An addition of 1 at.% rare earth metal to Co20 Cu 80 yields a considerable increase in the magnetoresistance ratio, whereas an addition of 3 at.% causes a decrease. E.g., by addition of 1 at.% Dy to Co20 Cum and optimal thermal treatment, the value of magnetoresistance ratio measured at 10 K in a field of 5 T increases from -14% to -28%. The effect can be attributed to the presence of clusters of hexagonal Dy(Co,Cu) 5 , which was ascertained from X-ray diffraction data, or other, metastable rare-earth compounds and paramagnetic rare-earth atoms in the Cu matrix.PACS numbers: 75.70.Ρa, 75.50.TtGranular solids consisting of nano-sized particles of ferromagnetic metals dispersed in a nonmagnetic metallic matrix have recently been the subject of particular interest mainly because of their unusual magnetotransport properties. Frequently, the magnetoresistance of such materials is isotropic and negative. This effect is the so-called giant magnetoresistance (GMR). Such granular metals can be derived from supersaturated alloys of immiscible systems, which may be produced by magnetron sputtering [1], mechanical alloying [2] or melt-spinning [3], usually followed by a thermal treatment to prompt a decomposition reaction. A well-known example of a granular system showing the GMR-effect is the Cu-Co system. Due to incomplete mixing and/or by a decomposition reaction, ultrafine Co-precipitates in a Cu-rich matrix can be produced [1,3]. The Co-precipitates Β. Idzikowski acknowledges support by Saxonian Ministry for Sciences and Arts. †