The gene for bifunctional deacetoxycephalosporin C synthetase/hydroxylase of Cephalosporium acremonium was cloned and overexpressed as an insoluble and inactive enzyme in granules of recombinant Escherichia coli. About 40-60% of expected synthetase activity along with 50-80% protein purity could be recovered directly from granular extracts with only a single empirically optimized refolding step. Further purification to homogeneity was achieved by a single anion-exchange-chromatographic step in the presence of denaturing concentrations of urea. The main obstacle to converting the homogeneous unfolded protein into the active enzyme was a urea-dependent aggregation during refolding that led to irreversible enzyme inactivation. Information obtained from refolding studies using gel-filtration HPLC, fluorescence spectroscopy and disulphide analysis led to an optimal enzyme refolding scheme that resulted in a highly active (i.e. 65-75% of the expected activity) and moderately stable fungal synthetase/hydroxylase.