Cell-wall preparations of Micrococcus luteus (lysodeikticus) catalyze in vitro peptidoglycan synthesis from UDP N-acetyl-D-glucosamine, UDP N-acetylmuramic acid-pentapeptide, and glycine. Newly synthesized peptidoglycan is partially cross-linked by a transpeptidation reaction with concomitant release of C-terminal D-alanine. Penicillin not only strongly inhibits release of D-alanine (98% at 1 mug/ml), but also markedly inhibits incorporation of acetylglucosamine and N-acetylmuramic acid-pentapeptide into the preformed cell-wall peptidoglycan. The simplest explanation for the results is that incorporation of newly synthesized strands of peptidoglycan and their attachment to "older" cell-wall peptidoglycan proceeds mainly by transpeptidation and that transglycosylation is responsible only for part of the elongation of the pre-existing peptidoglycan. Another possibility is that incorporation occurs by transglycosylation, but it cannot continue without concurrent formation of peptide cross-bridges.