Lignin biosynthesis is evolutionarily conserved among higher plants and features a critical 3-hydroxylation reaction involving phenolic esters. However, increasing evidence questions the involvement of a single pathway to lignin formation in vascular plants. Here we describe an enzyme catalyzing the direct 3-hydroxylation of 4-coumarate to caffeate in lignin biosynthesis as a bifunctional peroxidase that oxidizes both ascorbate and 4-coumarate at comparable rates. A combination of biochemical and genetic evidence in the model plants Brachypodium distachyon and Arabidopsis thaliana supports a role for this coumarate 3-hydroxylase (C3H) in the early steps of lignin biosynthesis. The subsequent efficient O-methylation of caffeate to ferulate in grasses is substantiated by in vivo biochemical assays. Our results identify C3H as the only non-membrane bound hydroxylase in the lignin pathway and revise the currently accepted models of lignin biosynthesis, suggesting new gene targets to improve forage and bioenergy crops.