A strain of Alcaligenes eutrophus has been isolated from the soil by enrichment culture technique with nerolidol (1), a sesquiterpene alcohol, as the sole source of carbon and energy. Fermentation of nerolidol (1) by this bacterium in a mineral salts medium resulted in the formation of two major metabolites, viz. geranylacetone (2) and an optically active alcohol, (S)-(+)-geranylacetol (3). Nerolidol (1)-induced cells readily transformed 1,2-epoxynerolidol (4) and 1,2-dihydroxynerolidol (5) into geranylacetone (2). These cells also exhibited their ability to carry out stereospecific reduction of 2 into (S)-( + )-geranylacetol (3). Oxygen uptake studies clearly indicated that nerolidol-induced cells oxidized compounds 2, 3, 4, 5 and ethyleneglycol (7). Based on the nature of the metabolites isolated, the ability of nerolidol-induced cells to convert compounds 4 and 5 into geranylacetone (2), and oxygen uptake studies, a pathway for the microbial degradation of nerolidol (1) has been proposed. The proposed pathway envisages the epoxidation of the terminal double bond, opening of the epoxide and cleavage between C-2 and C-3 in a manner similar to the periodate oxidation of cis-diol. The cell-free extract prepared from nerolidol-induced cells readily carried out the asymmetric reduction of compound 2 to an optically active alcohol (3) in the presence of NAD(P)H. The cell-free extract carried out both oxidation and reduction reactions at two different pH values and exhibited wide substrate specificity towards various steroids besides terpenes.