The present invention concerns a new &bgr;-galactosidase with transgalactosylating activity isolated from Bifidobacterium bifidum and a truncated enzyme where the C-terminal end of the &bgr;-galactosidase protein has been deleted, resulting in an enzyme with a higher transgalactosylating activity than hydrolase activity. When lactose is used as a substrate, galacto-oligosaccharides are products of the transgalactosylase activity. Galacto-oligosaccharides enhance growth of health-promoting Bifidobacterium that may be used in a number of applications in the dairy industry.