Phenalinolactones are novel terpene glycoside antibiotics produced by Streptomyces sp. Tü6071. Inactivation of three oxygenase genes (plaO2, plaO3 and plaO5), two dehydrogenase genes (plaU, plaZ) and one putative acetyltransferase gene (plaV) led to the production of novel phenalinolactone derivatives (PL HS6, PL HS7, PL HS2 and PL X1). Furthermore, the exact biosynthetic functions of two enzymes were determined, and their in vitro activities were demonstrated. PlaO1, an Fe(II)/alpha-ketoglutarate-dependent dioxygenase, is responsible for the key step in gamma-butyrolactone formation, whereas PlaO5, a cytochrome P450-dependent monooxygenase, catalyses the 1-C-hydroxylation of phenalinolactone D. In addition, stable isotope feeding experiments with biosynthetic precursors shed light on the origin of the carbons in the gamma-butyrolactone moiety.