Deacetoxycephalosporin C hydroxylase from cell-free extracts of Streptomyces clavuligerus was stabilized partially and purified to near homogeneity by three anion-exchange chromatographies, ammonium sulfate fractionation, and two gel filtrations. The hydroxylase was a monomer with a Mr of 35,000-38,000. alpha-Ketoglutarate, ferrous iron, and molecular oxygen were required for the enzyme activity. The hydroxylase was optimally active between pH 7.0 and 7.4 in a 3-(N-morpholino)propanesulfonic acid buffer and at 29 degrees C. It was stimulated by a reducing agent, particularly dithiothreitol or reduced glutathione, and ATP. The requirement for ferrous ion was specific, and at least one sulfhydryl group was apparently essential for the enzymatic hydroxylation. The Km values of the hydroxylase for deacetoxycephalosporin C and alpha-ketoglutarate were 59 and 10 microM, respectively, and the Ka for ferrous ion was 20 microM. In addition to its known hydroxylation of deacetoxycephalosporin C to deacetylcephalosporin C, the hydroxylase catalyzed effectively an analogous hydroxylation of 3-exomethylenecephalosporin C to deacetoxycephalosporin C. Surprisingly, the hydroxylase also mediated slightly a novel ring-expansion of penicillin N to deacetoxycephalosporin C. The substrate specificity of the hydroxylase is overlapping with but distinguishable from that of deacetoxycephalosporin C synthase, the enzyme which normally mediates the ring-expansion reaction (Dotzlaf, J. E., and Yeh, W. K. (1989) J. Biol. Chem. 264, 10219-10227). Furthermore, the hydroxylase exhibited an extensive sequence similarity to the synthase. Thus, the two enzymes catalyzing the consecutive reactions for cephamycin C biosynthesis in S. clavuligerus represent apparent products from a divergent evolution.