Aspergillus nidulans utilizes phenylacetate as a carbon source via homogentisate, which is degraded to fumarate and acetoacetate. Mutational evidence strongly suggested that phenylacetate is converted to homogentisate through two sequential hydroxylating reactions in positions 2 and 5 of the aromatic ring. Using cDNA substraction techniques, we have characterized a gene, denoted phacA, whose transcription is strongly induced by phenylacetate and which putatively encodes a cytochrome P450 protein. A disrupted phacA strain does not grow on phenylacetate but grows on 2-hydroxy- or 2, 5-dihydroxyphenylacetate. Microsomal extracts of the disrupted strain are deficient in the NADPH-dependent conversion of phenylacetate to 2-hydroxyphenylacetate. We conclude that PhacA catalyzes the ortho-hydroxylation of phenylacetate, the first step of A. nidulans phenylacetate catabolism. The involvement of a P450 enzyme in the ortho-hydroxylation of a monoaromatic compound has no precedent. In addition, PhacA shows substantial sequence divergence with known cytochromes P450 and defines a new family of these enzymes, suggesting that saprophytic fungi may represent a source of novel cytochromes P450. Phenylacetate is a precursor for benzylpenicillin production. phacA disruption increases penicillin production 3-5-fold, indicating that catabolism competes with antibiotic biosynthesis for phenylacetate and strongly suggesting strategies for Penicillium chrysogenum strain improvement by reverse genetics.