Insertion of 1,2-disubstituted alkynes into [Pd(CH3)(CO)(BIOX)]+[B{3,5-(CF3)2C6H3}4]- (1), where BIOX=(4S,4'S)-(-)-4,4',5,5'-tetrahydro-4,4'-bis(1-methylethyl)-2,2'-bioxazole, leads to the formation of five-membered palladacycles, which, by reaction with carbon monoxide, produce a mixture of two diastereomeric forms of a palladium complex containing an eta3-allylic gamma-lactone ligand. On leaving the mixture in solution, one isomer was converted into the other, reaching a diastereomeric excess of up to 94 %. The steric and electronic factors responsible for the epimerization process were investigated by theoretical methods. Cleavage of the eta3-allyl--palladium bond by nucleophiles allowed highly substituted chiral butenolides to be synthesized in good enantiomeric excess.