Nicotine catabolism, linked in Arthrobacter nicotinovorans to the presence of the megaplasmid pAO1, leads to the formation of γ-N-methylaminobutyrate from the pyrrolidine ring of the alkaloid. Until now the metabolic fate of γ-N-methylaminobutyrate has been unknown. pAO1 carries a cluster of ORFs with similarity to sarcosine and dimethylglycine dehydrogenases and oxidases, to the bifunctional enzyme methylenetetrahydrofolate dehydrogenase/cyclohydrolase and to formyltetrahydrofolate deformylase. We cloned and expressed the gene carrying the sarcosine dehydrogenase-like ORF and showed, by enzyme activity, spectrophotometric methods and identification of the reaction product as γ-aminobutyrate, that the predicted 89 395 Da flavoprotein is a demethylating γ-N-methylaminobutyrate oxidase. Site-directed mutagenesis identified His67 as the site of covalent attachment of FAD and confirmed Trp66 as essential for FAD binding, for enzyme activity and for the spectral properties of the wild-type enzyme. A Km of 140 μM and a kcat of 800 s-1 was determined when γ-N-methylaminobutyrate was used as the substrate. Sarcosine was also turned over by the enzyme, but at a rate 200-fold slower than γ-N-methylaminobutyrate. This novel enzyme activity revealed that the first step in channelling the γ-N-methylaminobutyrate generated from nicotine into the cell metabolism proceeds by its oxidative demethylation.