The present invention concerns a new β-galactosidase with transgalactosylating activity isolated from Bifidobacterium bifidum. The β-galactosidase is capable of converting lactose to a mixture of galactooligosaccharides which are β-linked and unexpectedly produces the α-linked disaccharide galactobiose. The mixture may be incorporated into numerous food products or animal feeds for improving gut health by promoting the growth of bifidobacteria in the gut, and repressing the growth of the pathogenic microflora.