Aerobic granules effectively degrade phenol at high concentrations. This work cultivated aerobic granules that can degrade phenol at a constant rate of 49 mg-phenol/g·VSS/h up to 1,000 mg/L of phenol. Fluorescent staining and confocal laser scanning microscopy (CLSM) tests demonstrated that an active biomass was accumulated at the granule outer layer. A strain with maximum ability to degrade phenol and a high tolerance to phenol toxicity isolated from the granules was identified as Candida tropicalis via 18S rRNA sequencing. This strain degrades phenol at a maximum rate of 390 mg-phenol/g·VSS/h at pH 6 and 30°C, whereas inhibitory effects existed at concentrations >1,000 mg/L. The Haldane kinetic model elucidates the growth and phenol biodegradation kinetics of the C. tropicalis. The fluorescence in situ hybridization (FISH) and CLSM test suggested that the Candida strain was primarily distributed throughout the surface layer of granule; hence, achieving a near constant reaction rate over a wide range of phenol concentration. The mass transfer barrier provided by granule matrix did not determine the reaction rates for the present phenol-degrading granule. Biotechnol. Bioeng. 2007;96:844–852. © 2006 Wiley Periodicals, Inc.