Macrocyclization of polyketides generates arrays of molecular architectures that are directly linked to biological activities. The four-membered ring in oxetanones (�]-lactones) is found in a variety of bioactive polyketides (for example, lipstatin, hymeglusin and ebelactone), yet details of its molecular assembly have not been extensively elucidated. Using ebelactone as a model system, and its producer Streptomyces aburaviensis ATCC 31860, labeling with sodium [1-(13)C,(18)O2]propionate afforded ebelactone A that contains (18)O at all oxygen sites. The pattern of (13)C-(18)O bond retention defines the steps for ebelactone biosynthesis, and demonstrates that �]-lactone ring formation occurs by attack of a �]-hydroxy group onto the carbonyl moiety of an acyclic precursor. Reaction of ebelactone A with N-acetylcysteamine (NAC) gives the �]-hydroxyacyl thioester, which cyclizes quantitatively to give ebelactone A in aqueous ethanol. The putative gene cluster encoding the polyketide synthase (PKS) for biosynthesis of 1 was also identified; notably the ebelactone PKS lacks a terminal thioesterase (TE) domain and no stand alone TE was found. Thus the formation of ebelactone is not TE dependent, supporting the hypothesis that cyclization occurs on the PKS surface in a process that is modeled by the chemical cyclization of the NAC thioester.