Prolyl 4-hydroxylase domain (PHD) proteins are oxygen-dependent enzymes that hydroxylate hypoxia-inducible transcription factor (HIF) alpha-subunits, leading to their subsequent ubiquitination and degradation. Paradoxically, the expression of two family members (PHD2 and PHD3) is induced in hypoxic cell culture despite the reduced availability of the oxygen co-substrate, and it has been suggested that they become functionally relevant following re-oxygenation to rapidly terminate the HIF response. Here we show that PHDs are also induced in hypoxic mice in vivo, albeit in a tissue-specific manner. As demonstrated under chronically hypoxic conditions in vitro, PHD2 and PHD3 show a transient maximum but remain up-regulated over more than 10 days, suggesting a feedback down-regulation of HIF-1alpha which then levels off at a novel set point. Indeed, hypoxic induction of PHD2 and PHD3 is paralleled by the attenuation of endogenous HIF-1alpha. Using an engineered oxygen-sensitive reporter gene in a cellular background lacking endogenous HIF-1alpha and hence inducible PHD expression, we could show that increased exogenous PHD levels can compensate for a wide range of hypoxic conditions. Similar data were obtained in a reconstituted cell-free system in vitro. In summary, these results suggest that due to their high O2 Km values, PHDs have optimal oxygen-sensing properties under all physiologically relevant oxygen concentrations; increased PHDs play a functional role even under oxygen-deprived conditions, allowing the HIF system to adapt to a novel oxygen threshold and to respond to another hypoxic insult. Furthermore, such an autoregulatory oxygen-sensing system would explain how a single mechanism works in a wide variety of differently oxygenated tissues.