Ginsenosides have been thought to be the major pharmacological active ingredient in the roots of Panax quinquefolius, P. ginseng and other Panax plants. Glycosylation is the last step in the biosynthesis pathway of ginsenosides and leads to the formation of various secondary metabolites. As for P. quinquefolius, dammarenediol-II synthase (PqDS), protopanaxadiol synthase (PqD12H) and protopanaxatriol synthase (CYP6H) have been cloned and identified in the early time. Here, we cloned and identified a novel UDP-glycosyltransferase (UGT) gene from P. quinquefolius (Pq3-O-UGT1, GenBank accession no. KiR028477) for the first time, reverse transcription-PCR (RT-PCR) analysis showed a remarkable transcription increase of Pq3-O-UGT1 in the methyl jasmonate (MeJA)-treated hairy roots, in vitro enzymatic assay confirmed that Pq3-O-UGT1 catalyzed the glycosylation of protopanaxadiol to produce ginsenoside Rh2 whose chemical structure was confirmed using high performance liquid chromatography electrospray ionization mass spectrometry (HPLC/ESI-MS). Moreover, overexpression of Pq3-O-UGT1 led to increased accumulation of Pq3-O-UGT1 mRNA and a higher level of protopanaxadiol-group ginsenosides (especially for Rh2 and Rd) in transgenic hairy roots, whereas, RNA interference against Pq3-O-UGT1 in transgenic hairy roots resulted in the relative decrease of Pq3-O-UGT1 transcription and lower content of ginsenoside Rh2. Interestingly, both overexpression and RNAi upregulated the key upstream genes Pq-D12H and Pq-CYP6H, and there was no effect on the upstream gene of Pq-DS. Thus, these results indicate that Pq3-O-UGT1 is a key enzyme for the synthesis of ginsenoside Rh2 and plays a key role in the biosynthesis of protopanaxadiol-group ginsenosides in P. quinquefolius.