Isomaltulose synthase from Klebsiella sp. LX3 (PalI, EC 5.4.99.11) catalyzes the isomerization of sucrose to produce isomaltulose (alpha-D-glucosylpyranosyl-1,6-D-fructofuranose) and trehalulose (alpha-D-glucosylpyranosyl-1,1-d-fructofuranose). The PalI structure, solved at 2.2-A resolution with an R-factor of 19.4% and Rfree of 24.2%, consists of three domains: an N-terminal catalytic (beta/alpha)8 domain, a subdomain between N beta 3 and N alpha 3, and a C-terminal domain having seven beta-strands. The active site architecture of PalI is identical to that of other glycoside hydrolase family 13 members, suggesting a similar mechanism in substrate binding and hydrolysis. However, a unique RLDRD motif in the proximity of the active site has been identified and shown biochemically to be responsible for sucrose isomerization. A two-step reaction mechanism for hydrolysis and isomerization, which occurs in the same pocket is proposed based on both the structural and biochemical data. Selected C-terminal truncations have been shown to reduce and even abolish the enzyme activity, consistent with the predicted role of the C-terminal residues in the maintenance of enzyme conformation and active site topology.