A diazo strategy for the intramolecular azirine ring expansion was developed. Azirinyl-substituted diazodicarbonyl compounds, prepared from diazoacetylazirines, were converted in excellent yields to 2-hydroxy-3-oxo-2,3-dihydro-1H-pyrrole-2-carboxylates under Rh catalysis in the presence of water. According to DFT calculations, the formation of only pyrrolinone derivatives and the absence of O-H insertion products of Rh carbene into water are due to the low Gibbs free energy of the transition state for the concerted opening of the azirine ring and recyclization to pyrrolone in intermediate Rh complexes.