We describe here a simple synthesis of 2-(diazoacetyl)cyclobutanones and their facile thermal rearrangement to 5-spirocyclopropyl-Δα,β-butenolides. The yield of the rearrangement product is high, and the reaction is completely stereospecific. α-Ketenylcyclobutanones have been identified spectroscopically as intermediates, and their rearrangement was studied kinetically. A strained dipolar cyclic transition is proposed for the rearrangement of the α-ketenylcyclobutanones to the corresponding 5-spirocyclopropyl-Δα,β-butenolides. © 1991, American Chemical Society. All rights reserved.