Caryoynencin is a toxic and antifungal fatty acid derivative produced by a number of plant-pathogenic and insect-protective bacteria (Trinickia caryophylli and Burkholderia spp.). In addition to the reactive tetrayne unit, the presence of an allylic alcohol moiety is critical for antimicrobial activities. By a combination of mutational analyses, heterologous expression and in vitro reconstitution experiments we show that the cytochrome P450 monooxygenase CayG catalyzes the complex transformation of a saturated carbon backbone into an allylic alcohol. Unexpectedly, CayG employs a ferritin-like protein (CayK) or a rubredoxin (CayL) component for electron transport. A desaturation-hydroxylation sequence was deduced from a time-course study and in vitro biotransformations with pathway intermediates, substrate analogues, protegencin congeners from Pseudomonas protegens Pf-5, and synthetic derivatives. This unusual multifunctional oxygenase may inspire future biocatalytic applications.