Rhodium-catalyzed carbon-hydrogen bond activation has attracted great interest in the construction of carbon-carbon and carbon-heteroatom bonds. In recent years, transition metal-mediated oxygen transposition through a 'dehydration-rehydration' process has been considered as a promising strategy towards oxygen-functionalized compounds. Here we describe an unexpected rhodium-catalyzed regioselective carbon-hydrogen bond activation/ cyclization of easily available indolyl aldehydes or ketones with alkynes to afford benzo-fused oxindoles, involving the sequential carbonyl-assisted carbon-hydrogen activation of the indole ring at the 4-position, [4 þ 2] cyclization, aromatization via dehydration, nucleophilic addition of water to iminium and oxidation. Isotopic labelling experiments disclose the occurrence of apparent oxygen transposition via dehydration-rehydration from the indolyl-3-carbonyl group to the 2-position of pyrrole to forge a new carbonyl bond. The tandem reaction has been used as the key step for the concise synthesis of priolines, a type of alkaloid isolated from the roots of Salvia prionitis.