The 4- and 5-hydroxylations of phenolic compounds in plants are catalyzed by cytochrome P450 enzymes. The 3-hydroxylation step leading to the formation of caffeic acid from p-coumaric acid remained elusive, however, alternatively described as a phenol oxidase, a dioxygenase, or a P450 enzyme, with no decisive evidence for the involvement of any in the reaction in planta. In this study, we show that the gene encoding CYP98A3, which was the best possible P450 candidate for a 3-hydroxylase in the Arabidopsis genome, is highly expressed in inflorescence stems and wounded tissues. Recombinant CYP98A3 expressed in yeast did not metabolize free p-coumaric acid or its glucose or CoA esters, p-coumaraldehyde, or p-coumaryl alcohol, but very actively converted the 5-O-shikimate and 5-O-d-quinate esters of trans-p-coumaric acid into the corresponding caffeic acid conjugates. The shikimate ester was converted four times faster than the quinate derivative. Antibodies directed against recombinant CYP98A3 specifically revealed differentiating vascular tissues in stem and root. Taken together, these data show that CYP98A3 catalyzes the synthesis of chlorogenic acid and very likely also the 3-hydroxylation of lignin monomers. This hydroxylation occurs on depsides, the function of which was so far not understood, revealing an additional and unexpected level of networking in lignin biosynthesis.