In this paper we completely describe graphically Leavitt path algebras with bounded index of nilpotence. We show that the Leavitt path algebra LK (E) has index of nilpotence at most n if and only if no cycle in the graph E has an exit and there is a fixed positive integer n such that the number of distinct paths that end at any given vertex v (including v, but not including the entire cycle c in case v lies on c) is less than or equal to n. Interestingly, the Leavitt path algebras having bounded index of nilpotence turn out to be precisely those that satisfy a polynomial identity. Furthermore, Leavitt path algebras with bounded index of nilpotence are shown to be directly-finite and to be Z-graded Σ-V rings. As an application of our results, we answer an open question raised in [10] whether an exchange Σ-V ring has bounded index of nilpotence.2010 Mathematics Subject Classification. 16D50, 16D60.