Mildiomycin (MIL) is a peptidyl nucleoside antibiotic with strong activity against powdery mildew disease of plants. We have cloned the MIL biosynthetic gene cluster in Streptoverticillum rimofaciens ZJU5119 and shown that this organism also produces the related antifungal compound, deshydroxymethyl mildiomycin (dHM-MIL). A cosmid genomic library was screened for a putative nucleotide hydrolase gene that is related to blsM from the blasticidin S cluster. Six cosmids were identified that contained a 3.5 kb DNA fragment that harbors a homologue of blsM. The sequence of the fragment revealed two open-reading frames that are likely to function in MIL formation: milA is a CMP hydroxymethylase gene and milB is the homologue of the CMP hydrolase gene blsM. Insertional disruption of milA abolished the production of MIL but not dHM-MIL, whereas a milB knockout strain did not produce either of the peptidyl nucleosides. Recombinant MilA was produced in E. coli and shown to specifically introduce a C-5 hydroxymethyl group on CMP, but it did not accept cytosine or dCMP as a substrate. MilB was also expressed and purified from E. coli and shown to efficiently hydrolyze both hydroxymethyl-CMP (HMCMP) and could accept CMP as an alternative substrate. The ratio of free HMC and cytosine released by MilB was ca. 9:1 in in vitro assays, and is consistent with the higher levels of MIL compared to dHM-MIL that are produced by Streptoverticillum rimofaciens.