Ketosynthase (KS) domains of modular type I polyketide synthases (PKSs) typically catalyze Claisen condensation of acyl and malonyl units to form linear chains. In stark contrast, the KS domain of the rhizoxin PKS branching module installs a β-branch by a Michael-type vinylogous addition, which sets the basis for a pharmacophoric δ-lactone moiety. The precise role of the KS domain was evaluated by site-directed mutagenesis, chemical probes, and biotransformations. Biochemical and kinetic analyses helped dissecting branching and lactonization reactions, and unequivocally assigned the entire reaction sequence to the KS. The range of accepted substrates was probed with diverse synthetic surrogates in vitro, showing that the KS tolerates defined acyl chain lengths to produce 5- to 7-membered lactones. These results show that the non-canonical rhizoxin KS is multifunctional as it not only catalyzes the branching but also the subsequent lactonization. Information on the increased product portfolio of the unusual, TE-independent on-line cyclization is relevant for future synthetic biology approaches.