The palladium-catalyzed annulation of internal alkynes by o-iodophenols in the presence of CO results in exclusive formation of coumarins. No isomeric chromones have been observed. The best reaction conditions utilize the 2-iodophenol, 5 equiv of alkyne, 1 atm of CO, 5 mol % Pd(OAc)2, 2 equiv of pyridine, and 1 equiv of n-Bu4NCl in DMF at 120 degrees C. The use of a sterically unhindered pyridine base is essential to achieve high yields. A wide variety of 3,4-disubstituted coumarins containing alkyl, aryl, silyl, alkoxy, acyl, and ester groups have been prepared in moderate to good yields. Mixtures of regioisomers have been obtained when unsymmetrical alkynes are employed. 2-iodophenols with electron-withdrawing and electron-donating substituents and 3-iodo-2-pyridone are effective in this annulation process. The reaction is believed to proceed via (1) oxidative addition of the 2-iodophenol to Pd(0), (2) insertion of the alkyne triple bond into the aryl-palladium bond, (3) CO insertion into the resulting vinylic carbon-palladium bond, and (4) nucleophilic attack of the phenolic oxygen on the carbonyl carbon of the acylpalladium complex with simultaneous regeneration of the Pd(0) catalyst. This annulation process is the first example of intermolecular insertion of an alkyne occurring in preference to CO insertion.