The structurally related macrolide antibiotics carbomycin (Cb) and spiramycin (Sp) are produced by Streptomyces thermotolerans and Streptomyces ambofaciens, respectively. Both antibiotics contain 16-membered lactone rings to which deoxysugars are attached. There are three sugars in Sp (forosamine, mycaminose and mycarose) and two sugars in Cb (mycaminose and a derivative of mycarose containing an isovaleryl group at position 4). We have identified the gene from S. thermotolerans (designated carE), which appears to encode an enzyme that acylates this mycarose sugar, and have shown that recombinant strains containing carE can use Sp as a substrate and convert it to the hybrid antibiotic, isovaleryl Sp (ivSp). Expression of carE was demonstrated in two heterologous hosts: in S. ambofaciens, where endogenously synthesized Sp was converted to ivSp, and in Streptomyces lividans where exogenously added Sp was converted to ivSp. The carE gene was isolated on a cosmid that also encodes genes required for Cb-lactone formation. These genes reside on a DNA segment of about 70 kb and are part of a Cb biosynthetic gene cluster that is flanked by two Cb-resistance genes, carA and carB. Mapping studies and nucleotide sequence analysis revealed that carE is located at one end of this gene cluster, immediately adjacent to the carB gene. Genes carB and carE are transcribed convergently and may share a common transcriptional terminator sequence.