γ- and δ-lactones are valuable flavor and fragrance compounds. Their synthesis depends on the availability of suitable hydroxy fatty acid precursors. Three short unspecific peroxygenases were identified that selectively hydroxylate the C4 and C5 positions of C8-C12 fatty acids to yield after lactonization the corresponding γ- and δ-lactones. A preference for C4 over C5 hydroxylation gave γ-lactones as the major products. Overoxidation of the hydroxy fatty acids was addressed via the reduction of the resulting oxo acids using an alcohol dehydrogenase in a bienzymatic cascade reaction.