A three-gene salb cluster from Streptomyces albofaciens was proven to be responsible for the formation of cyclo-l-Trp-l-Leu (cWL) derivatives. An Escherichia coli strain harboring the cyclodipeptide synthase (CDPS) gene salbA produced cWL. Expression of the whole cluster or genes of various combinations in Streptomyces coelicolor revealed different metabolites of cWL by two cytochrome P450 enzymes. Isolation and structure elucidation proved the conversion of cWL to guatrypleumycine A by nucleobase transfer with SalbB and to cyclo(trans-10-hydroxy-l-Trp-l-Leu) by hydroxylation with SalbC. Incubation with 15NH4Cl supported the incorporation of guanine in guatrypleumycine A and an X-ray crystallographic study confirmed the stereospecific hydroxylation at C-10 of the tryptophanyl residue. Cultivation of the salbB or salbC expression strains with different substrates further proved the divergent metabolisms of cWL. To the best of our knowledge, SalbC is the first report of the P450 enzyme from CDPS-associated pathways to catalyze β-hydroxylation at the amino acid side chain.