A new gene (galM) has been identified as the fourth cistron of the gal operon, encoding enzymes for the metabolism of galactose and lactose in Escherichia coli. Induction of the gal operon either from the gal promoters or from a neighboring prophage lambda promoter expresses the galM gene as well. The new structure of the gal operon from the promoter end is galE-galT-galK-galM in counter-clockwise orientation on the chromosome. Genetic and biochemical analyses have revealed that the galM gene product has mutarotase activity, which converts alpha-aldose to the beta-anomer. Unlike mutarotase from other bacteria in which the enzyme is primarily processed for export and secretion, the mutarotase from E. coli does not appear to be processed and yet is still found in periplasm (and culture media when overexpressed) in significant amounts. Although the interconversion of the sugar anomers occurs spontaneously in pure water in vitro, the in vivo formation of alpha-D-galactopyranose (the substrate for phosphorylation) from beta-D-galactopyranose (generated by beta-galactosidase hydrolysis of lactose) is largely dependent upon the presence of the mutarotase. This shows that efficient lactose metabolism requires mutarotase. These results give credence to the idea that the activity of intracellular water is not high enough to permit a simple extrapolation of observed in vitro reactions to in vivo situations in every case.