Red algae (Rhodophyta) and land plants belong to the monophyletic clade Archaeplastida, and taxa of both groups are rich producers of terpene secondary metabolites. The terpene carbon skeletons of land plants are made by two types of terpene synthases: typical plant terpene synthases and microbial-type terpene synthases (MTPSLs); however, terpene biosynthesis in red algae is poorly understood. By systematic sequence analysis of seven genomes and 34 transcriptomes of red algae, MTPSL homologs were identified within one genome and two transcriptomes, whereas no homolog of typical plant terpene synthase genes was found. Phylogenetic analysis showed that red algae MTPSLs group with bacterial terpene synthases. Analysis of the genome assembly and characterization of neighboring genes demonstrated red algal MTPSLs to be bona fide red algal genes and not microbial contaminants. MTPSL genes from Porphyridium purpureum and Erythrolobus australicus were characterized via heterologous expression in Escherichia coli and demonstrated to have sesquiterpene synthase activities. We detected a number of volatile sesquiterpenes in the headspace of P. purpureum and E. australicus cultures, most identical to the in vitro products of the respective MTPSLs. Expression of the MTPSL gene in P. purpureum was found to be induced by methyl jasmonate, suggesting a role for this gene in host defense. In summary, this study indicates that the formation of terpene carbon skeletons in red algae is carried out by MTPSLs that are phylogenetically unrelated to typical plant terpene synthases and most likely originated in Rhodophyta via horizontal gene transfer from bacteria.