Living microbial cells are considered to be the catalyst of choice for selective terpene functionalization. However, such processes often suffer from side product formation and poor substrate mass transfer into cells. For the hydroxylation of (S)-limonene to (S)-perillyl alcohol by Pseudomonas putida KT2440 (pGEc47B)(pCom8-PFR1500), containing the cytochrome P450 monooxygenase CYP153A6, the side products perillyl aldehyde and perillic acid constituted up to 26% of the total amount of oxidized terpenes. In this study, it is shown that the reaction rate is substrate-limited in the two-liquid phase system used and that host intrinsic dehydrogenases and not CYP153A6 are responsible for the formation of the undesired side products. In contrast to P. putida KT2440, E. coli W3110 was found to catalyze perillyl aldehyde reduction to the alcohol and no oxidation to the acid. Furthermore, E. coli W3110 harboring CYP153A6 showed high limonene hydroxylation activities (7.1UgCDW1). The outer membrane protein AlkL was found to enhance hydroxylation activities of E. coli twofold in aqueous single-phase and fivefold in two-liquid phase biotransformations. In the latter system, E. coli harboring CYP153A6 and AlkL produced up to 39.2mmol (S)-perillyl alcohol Ltot1 within 26h, whereas no perillic acid and minor amounts of perillyl aldehyde (8% of the total products) were formed. In conclusion, undesired perillyl alcohol oxidation was reduced by choosing E. coli's enzymatic background as a reaction environment and co-expression of the alkL gene in E. coli represents a promising strategy to enhance terpene bioconversion rates. Biotechnol. Bioeng. 2013; 110: 12821292. (c) 2012 Wiley Periodicals, Inc.