Icariin is the most effective bioactive compound in Herba Epimedii. To enhance the content of icariin in the epimedium water extract, a novel strain, Papiliotrema laurentii ZJU-L07, producing an intracellular α-L-rhamnosidase was isolated from the soil and mutagenized. The specific activity of α-L-rhamnosidase was 29.89 U·mg−1 through purification, and the molecular mass of the enzyme was 100 kDa, as assayed by SDS-PAGE. The characterization of the purified enzyme was determined. The optimal temperature and pH were 55 °C and 7.0, respectively. The enzyme was stable in the pH range 5.5–9.0 for 2 h over 80% and the temperature range 30–40 °C for 2 h more than 70%. The enzyme activity was inhibited by Ca2+, Fe2+, Cu2+, and Mg2+, especially Fe2+. The kinetic parameters of Km and Vmax were 1.38 mM and 24.64 μmol·mg−1·min−1 using pNPR as the substrate, respectively. When epimedin C was used as a nature substrate to determine the kinetic parameters of α-L-rhamnosidase, the values of Km and Vmax were 3.28 mM and 0.01 μmol·mg−1·min−1, respectively. The conditions of enzymatic hydrolysis were optimized through single factor experiments and response surface methodology. The icariin yield increased from 61% to over 83% after optimization. The enzymatic hydrolysis method could be used for the industrialized production of icariin. At the same time, this enzyme could also cleave the α-1,2 glycosidic linkage between glucoside and rhamnoside in naringin and neohesperidin, which could be applicable in other biotechnological processes.