Recently, considerable insight has been gained into the modular organization and catalytic properties of nonribosomal peptide synthetases. However, molecular and biochemical aspects of the condensation of two aminoacyl substrates or a peptidyl and an aminoacyl substrate, leading to the formation of a peptide bond, have remained essentially impenetrable. To investigate this crucial part of nonribosomal peptide synthesis, an in vitro assay for a dipeptide formation was developed. Two recombinant holomodules, GrsA (PheATE), providing D-Phe, and a C-terminally truncated TycB, corresponding to the first, L-Pro-incorporating module (ProCAT), were investigated. Upon combination of the two aminoacylated modules, a fast reaction is observed, due to the formation of the linear dipeptide D-Phe-L-Pro-S-enzyme on ProCAT, followed by a noncatalyzed release of the dipeptide from the enzyme. The liberated product was identified by TLC, high pressure liquid chromatography-mass spectrometry, 1H and 13C NMR, and comparison with a chemically synthesized standard to be the expected D-Phe-L-Pro diketopiperazine. Further minimization of the two modules was not possible without a loss of transfer activity. Likewise, a mutation in a proposed active-site motif (HHXXXDG) of the condensation domain giving ProCAT(H147V), abolished the condensation reaction. These results strongly suggest the condensation domain to be involved in the catalysis of nonribosomal peptide bond formation with the histidine 147 playing a catalytic role.