Class I P450 monooxygenase from Rhodococcus coprophilus TC-2, termed P450tol, is the only naturally evolved toluene hydroxylating enzyme known to hydroxylate toluene to produce benzyl alcohol. To investigate its mechanism of action, we solved the unique crystal structures of P450tol and its complex with the substrate. The complex structure indicates that P450tol restricts the toluene binding position with several hydrophobic residues, such that the hydroxylation could take place precisely on the benzylic site. Notably, we found additional space in the toluene-binding pocket and thus examined P450tol activity toward larger substrates. As a result, several halogenated toluenes can also be hydroxylated by P450tol on the benzylic site. We also conducted site saturation mutagenesis (SSM) to enable subterminal or benzylic hydroxylation of propylbenzene. The resulting enantiopure alcohols are essential intermediates for the synthesis of important pharmaceuticals. To facilitate further applications, we fused P450tol and reductase domain derived from self-sufficient P450s. The chimeric enzymes containing the CYP116B46 reductase domain from thermophilic Tepidiphilus thermophiles (P450tol-CYP116B46) exhibit higher thermostability and catalytic activity than the one containing RhFRED reductase domain from mesophilic Rhodococcus sp. strain NCIMB 9784. In conclusion, we manifested the origin of regioselectivity of P450tol-catalyzed benzylic hydroxylation and explored the versatility in substrate utilization of P450tol. Furthermore, the self-sufficient chimeric enzyme with high catalytic activity and stability was generated. We are convinced that these results highlight the great potentials of P450tol in biotechnological and pharmaceutical applications.