Photosynthesis is the final determinator for crop yield. To gain insight into genes controlling photosynthetic capacity, we selected from our large T-DNA mutant population a rice stunted growth mutant with decreased carbon assimilate and yield production named photoassimilate defective1 (phd1). Molecular and biochemical analyses revealed that PHD1 encodes a novel chloroplast-localized UDP-glucose epimerase (UGE), which is conserved in the plant kingdom. The chloroplast localization of PHD1 was confirmed by immunoblots, immunocytochemistry, and UGE activity in isolated chloroplasts, which was approximately 50% lower in the phd1-1 mutant than in the wild type. In addition, the amounts of UDP-glucose and UDP-galactose substrates in chloroplasts were significantly higher and lower, respectively, indicating that PHD1 was responsible for a major part of UGE activity in plastids. The relative amount of monogalactosyldiacylglycerol (MGDG), a major chloroplast membrane galactolipid, was decreased in the mutant, while the digalactosyldiacylglycerol (DGDG) amount was not significantly altered, suggesting that PHD1 participates mainly in UDP-galactose supply for MGDG biosynthesis in chloroplasts. The phd1 mutant showed decreased chlorophyll content, photosynthetic activity, and altered chloroplast ultrastructure, suggesting that a correct amount of galactoglycerolipids and the ratio of glycolipids versus phospholipids are necessary for proper chloroplast function. Downregulated expression of starch biosynthesis genes and upregulated expression of sucrose cleavage genes might be a result of reduced photosynthetic activity and account for the decreased starch and sucrose levels seen in phd1 leaves. PHD1 overexpression increased photosynthetic efficiency, biomass, and grain production, suggesting that PHD1 plays an important role in supplying sufficient galactolipids to thylakoid membranes for proper chloroplast biogenesis and photosynthetic activity. These findings will be useful for improving crop yields and for bioenergy crop engineering.