Homogeneous palladium-catalyzed (Pd-catalyzed) cyclocarbonylation of unsaturated allylic alcohols and alkynols in the presence of hydrogen forms lactone products with important applications in the food, perfume, and polymer industry. In this work, the cyclocarbonylation of 2-methyl-3-buten-2-ol was studied for the first time using a very active Pd-DPEphos (bis[(2-diphenylphosphino)phenyl]ether) catalyst in the presence of the ionic liquid (IL) [BMIM]Cl (1-butyl-3-methylimidazolium chloride) in dichloromethane to selectively produce 4,4-dimethyl-γ-butyrolactone. The effect of different parameters such as temperature, gas partial pressures, time of reaction, substrate and ligand concentrations were investigated and found to provide optimal conditions for lactonization (95 °C, 28 bar (CO/H2/N2: 20/5/3)), 18 h, 0.1 M substrate, and 16 mol% DPEphos), which were significantly milder than previously reported systems for cyclocarbonylation. Importantly, the study further showed that presence of the IL in the reaction mixture provided stabilization of the catalyst system and prevented formation of Pd-black, which allowed reuse of the catalytic system in consecutive reactions after intermediate extraction of the lactone product.