Two new dihydroxy-xanthone metabolites, agnestins A and B, were isolated from Paecilomyces variotii along with a number of related benzophenones and xanthones including monodictyphenone. The structures were elucidated by NMR analyses and X-ray crystallography. The agnestin (agn) biosynthetic gene cluster was identified and targeted gene disruptions of the PKS, Baeyer-Villiger monooxygenase, and other oxido-reductase genes revealed new details of fungal xanthone biosynthesis. In particular, identification of a reductase responsible for in vivo anthraquinone to anthrol conversion confirms a previously postulated essential step in aromatic deoxygenation of anthraquinones, e.g. emodin to chrysophanol.