The fungal metabolite Fosfonochlorin features a chloroacetyl moiety that is unusual within known phosphonate natural product biochemistry. Putative biosynthetic genes encoding Fosfonochlorin in Fusarium and Talaromyces spp. were investigated through reactions of encoded enzymes with synthetic substrates and isotope labelling studies. We show that the early biosynthetic steps for Fosfonochlorin involve the reduction of phosphonoacetaldehyde to form 2-hydroxyethylphosphonic acid, followed by oxidative intramolecular cyclization of the resulting alcohol to form (S)-epoxyethylphosphonic acid. The latter reaction is catalyzed by FfnD, a rare example of a non-heme iron/2-(oxo)glutarate dependent oxacyclase. In contrast, FfnD behaves as a more typical oxygenase with ethylphosphonic acid, producing (S)-1-hydroxyethylphosphonic acid. FfnD thus represents a new example of a ferryl generating enzyme that can suppress the typical oxygen rebound reaction that follows abstraction of a substrate hydrogen by a ferryl oxygen, thereby directing the substrate radical towards a fate other than hydroxylation. © 2021 Wiley-VCH GmbH.