Rat liver phenylalanine hydroxylase that has been activated with lysolecithin catalyzes the hydroxylation of 4-methylphenylalanine in the presence of a pterin cofactor. Two products, 4-hydroxymethylphenylalanine and 3-methyltyrosine, can be detected. The total amount of amino acids hydroxylated is equal to the amount of tetrahydropterin oxidized. Isotopic labeling studies with (O2)-O-18 and (H2O)-O-18 show that the hydroxyl groups of both products are derived from molecular oxygen and not from water. Results obtained with H-2-labeled substrates support the conclusion that these products are formed via different mechanistic pathways. Our previous investigations on substrate analogs, as well as the present results, indicate that a highly reactive oxygen-containing intermediate, such as an enzyme-bound iron-oxo compound, must be the hydroxylating species. Our present results could stimulate further discussion of the possibility that the reaction mechanism for the "NIH-shift" of the methyl group may not involve the spontaneous opening of an epoxide intermediate.