Among several fatty acids tested, oleic acid was selected as the most efficient inducer for the production of 4-hydroxydodecanoic acid, a metabolite of beta-oxidation, by Waltomyces lipofer. Cells were induced by incubation for 12 h in a medium containing 10 g l(-1) yeast extract, 10 g l(-1) peptone, 5 g l(-1) oleic acid, 1 g l(-1) glucose, and 0.05 % (w/v) Tween 80. The optimal reaction conditions for the production of gamma-lactones by induced cells were pH 6.5, 35 A degrees C, 200 rpm, 0.71 M Tris, 60 g l(-1) hydroxy fatty acid, and 20 g l(-1) cells. Non-induced cells produced 38 g l(-1) gamma-dodecalactone from 60 g l(-1) 10-hydroxystearic acid after 30 h, with a conversion yield of 63 % (w/w) and a productivity of 1.3 g l(-1) h(-1) under the optimized conditions, whereas induced cells produced 51 g l(-1) gamma-dodecalactone from 60 g l(-1) 10-hydroxystearic acid after 30 h, with a conversion yield of 85 % (w/w) and a productivity of 1.7 g l(-1) h(-1). The conversion yield and productivity of induced cells were 22 % and 1.3-fold higher, respectively, than those of non-induced cells. Induced cells also produced 28 g l(-1) gamma-decalactone and 12 g l(-1) gamma-butyrolactone from 60 g l(-1) 12-hydroxystearic acid and 60 g l(-1) 10-hydroxydecanoic acid, respectively, after 30 h. The concentration, conversion yield, and productivity of gamma-dodecalactone and gamma-decalactone are the highest reported thus far. This is the first study on the biotechnological production of gamma-butyrolactone.