We selected for spore-forming psychrophilic bacteria able to use lactose as a carbon source and one isolate, designated Paenibacillus sp. strain C7, that was phylogenetically related to, but distinct from both Paenibacillus macquariensis and Paenibacillus antarcticus. Some Escherichia coli transformants obtained with genomic DNA from this isolate hydrolyzed X-Gal (5-bromo-4-chloro-3-indoyl-beta-D-galactopyranoside) only below 30 degrees C, an indication of cold-active beta-galactosidase activity. Sequencing of the cloned insert revealed an open reading frame encoding a 756-amino acid protein that, rather than belonging to a family typically known for beta-galactosidase activity, belonged to glycoside hydrolase family 3, a family of beta-glucosidases. Because of this unusual placement, the recombinant enzyme (BglY) was purified and characterized. Consistent with its classification, the enzyme had seven times greater activity with the glucoside substrate ONPGlu (o-nitrophenyl-beta-D-glucopyranoside) than with the galactoside substrate ONPGal (o-nitrophenyl-beta-D-galactopyranoside). In addition, the enzyme had, with ONPGlu, a thermal optimum around 30 to 35 degrees C, activity over a broad pH range (5.5 to 10.9), and an especially low Km (<0.003 mM). Further examination of substrate preference showed that the BglY enzyme also hydrolyzed other aryl-beta-glucosides such as helicin, MUG (4-methylumbelliferyl-beta-D-glucopyranoside), esculin, indoxyl-beta-D-glucoside (a natural indigo precursor), and salicin, but had no activity with glucosidic disaccharides or lactose. These characteristics and substrate preferences make the BglY enzyme unique among the family 3 beta-glucosidases. The hydrolysis of a variety of aryl-beta-glucosides suggests that the enzyme may allow the organism to use these substrates in the environment and that its low Km on indoxyl-beta-D-glucoside may make it useful for producing indigo.