Guanacastane diterpenoids with an unusual 5/7/6 tricyclic skeleton mainly produced by basidiomycete fungi represent a structurally intriguing class of natural products. While the chemical synthesis of several members has been achieved, the biochemical and genetic basis of their biosynthesis remain unknown. Herein, we present the identification and characterization of two crucial enzymes in the biosynthesis of guanacastane diterpenoids in Psathyrella candolleana. Heterologous expression reveals that PsaD, a typical class I diterpene synthase, catalyzes the cyclization of geranylgeranyl diphosphate to form a new guanacastane-type diterpene, guanacasta-1,3-diene (7). Moreover, we demonstrate that PsaA, a cytochrome P450 monooxygenase, can catalyze multiple oxidations of 7 to yield guanacastepene U (8). These results provide new opportunities for genome mining and metabolic engineering of guanacastane diterpenoids.