The conversion of 1,3-diaryl-2-diazo-1,3-diketones to 1,2-daryl-1,2-diketones (benzils) is reported based on a rhodium(II)-catalyzed aerobic decomposition process. The reaction occurs at ambient temperatures and can be catalyzed by a few dirhodium carboxylates (5 mol %) under a balloon pressure of oxygen. Moreover, an oxygen atom from the O 2 reagent is shown to be incorporated into the product, and this is accompanied by the extrusion of a carbonyl unit from the starting materials. Mechanistically, it is proposed that the decomposition may proceed via the interaction of a ketene intermediate resulting from a Wolff rearrangement of the carbenoid, with a rhodium peroxide or peroxy radical species generated upon the activation of molecular oxygen. The proposed mechanism has been supported by the results from a set of controlled experiments. By using this newly developed strategy, a large array of benzil derivatives as well as 9,10-phenanthrenequinone were synthesized from the corresponding diazo substrates in varying yields. On the other hand, the method did not allow the generation of benzocyclobutene-1,2-dione from 2-diazo-1,3-indandione because of the difficulty of inducing the initial rearrangement.