Mortierella alpina is a filamentous fungus commonly found in soil that is able to produce lipids in the form of triacylglycerols that account for up to 50% of its dry weight. Analysis of the M. alpina genome suggests that there is a phenylalanine-hydroxylating system for the catabolism of phenylalanine, which has never been found in fungi before. We characterized the phenylalanine-hydroxylating system in M. alpina to explore its role in phenylalanine metabolism and its relationship to lipid biosynthesis. Significant changes were found in the profile of fatty acids in M. alpina grown on medium containing an inhibitor of the phenylalanine-hydroxylating system compared to M. alpina grown on medium without inhibitor. Genes encoding enzymes involved in the phenylalanine-hydroxylating system (phenylalanine hydroxylase [PAH], pterin-4α-carbinolamine dehydratase, and dihydropteridine reductase) were expressed heterologously in Escherichia coli, and the resulting proteins were purified to homogeneity. Their enzymatic activity was investigated by high-performance liquid chromatography (HPLC) or visible (Vis)-UV spectroscopy. Two functional PAH enzymes were observed, encoded by distinct gene copies. A novel role for tetrahydrobiopterin in fungi as a cofactor for PAH, which is similar to its function in higher life forms, is suggested. This study establishes a novel scheme for the fungal degradation of an aromatic substance (phenylalanine) and suggests that the phenylalanine-hydroxylating system is functionally significant in lipid metabolism.