Biotechnological upgrading of fossil fuels is of increasing interest as remaining stocks of petroleum show increasing levels of contaminants such as heavy metals, sulfur and nitrogen-containing heteroaromatic compounds. Carbazole is of particular interest as a major petroleum component known to reduce refining yields through catalyst poisoning. In this study, the biotransformation of carbazole was successfully demonstrated in a liquid two-phase system, when solubilized in either 1-methylnaphthalene or in diesel fuel. The effects of solvent toxicity were investigated by expressing the carbazole-transformation genes from MB1332, a rifampicin-resistant derivative of Pseudomonas sp. LD2, in a solvent-resistant heterologous host, P. putida Idaho [1]. This solvent-resistant strain successfully degraded carbazole solubilized in 1-methylnaphthalene and in the presence of 10 vol% xylenes similar to the non-recombinant strain Pseudomonas sp. LD2. Identification of a suitable recombinant host, however, was essential for further investigations of partial pathway transformations. Recombinant P. putida Idaho expressing only the initial dioxygenase enzymes transformed carbazole to an intermediate well retained in the oil phase. Partial carbazole transformation converts carbazole to non-aromatic species; their effect is unknown on refinery catalyst poisoning, but would allow almost complete retention of carbon content and fuel value.