Albonoursin production was greatly enhanced when cyclo (L-Leu-L-Phe) (CFL), a tetrahydro derivative of albonoursin, was added to the 2-day culture of an albonoursinproducing actinomycete, <i>Streptomyces albulus</i> KO-23. The increase in albonoursin production paralleled the amount of CFL added. Furthermore, the resting cells of the strain catalyzed the bioconversion of CFL to albonoursin. The optimum pH and temperature for the conversion were found to be pH 10.0 and 50°C. The feeding experiments and the resting-cell reactions revealed that albonoursin is biosynthesized by dehydrogenation of CFL in the actinomycete. This is the first report for a dehydrogenation of amino acid residues at the α, β-positions in cyclic dipeptides.