Fungal natural products from various species often feature hydroxamic acid motifs that have the ability to chelate iron. These compounds have an array of medicinally and ecologically relevant activities. Through genome mining, gene deletion in the host Aspergillus terreus, and heterologous expression experiments, this study has revealed that a nonribosomal peptide synthetase (NRPS) TamA and a specialized cytochrome P450 monooxygenase TamB catalyze the sequential biosynthetic reactions in the formation of terramides A-C, a series of diketopiperazines (DKPs) with hydroxamic acid motifs. Feeding experiments showed that TamB catalyzes an unprecedented di-hydroxylation of the amide nitrogens in the diketopiperazine core. This tailoring reaction led to the formation of two bidentate iron-binding sites per molecule with an unusual iron-binding stoichiometry. The structure of the terramide A-Fe complex was characterized by liquid chromatography-mass spectrometry (LC-MS), Fourier transform infrared spectroscopy (FT-IR), Raman spectroscopy and electron paramagnetic resonance spectroscopy (EPR). Antimicrobial assays showed that the iron-binding motifs are crucial for the activity against bacteria and fungi. Murine infection experiments indicated that terramide production is crucial for the virulence of A. terreus and could be a potential antifungal drug target.