A lipase-producing bacterium K107 was isolated from soil samples of China and identified to be a strain of Proteus sp. With genome-walking method, the open reading frame of lipase gene lipK107, encoding 287 amino acids, was cloned and expressed in a heterologous host, Escherichia coli BL21 (DE3). The recombinant lipase was purified and characterized, and the optimum pH of the purified LipK107 was 9, at 35 degrees C. The recombinant E. coli expressing lipK107 was applied in biodiesel production in the form of whole-cell biocatalyst. Activity of the biocatalyst increased significantly when cells were permeabilized with 0.3% (w/v) cetyl-trimethylammoniumbromide (CTAB). This transesterification was carried out efficiently in a mixture containing 5M equivalents of methanol to the oil and 100% water by weight of the substrate. It was the first time to use E. coli whole-cell biocatalyst expressing lipase in biodiesel production, and the biodiesel reached a yield of nearly 100% after 12h reaction at the optimal temperature of 15 degrees C, which was the lowest temperature among all the known catalyst in biodiesel production.