The first catalytic lactonization of unactivated aryl C-H bonds with CO2 to afford important phthalides is reported. Notably, this method features high selectivity, excellent functional group tolerance, smooth scalability, and facile product diversification. DFT calculations reveal that a novel insertion of two CO2 into the O-Pd bond of a palladacycle might be the key step, providing great potential and a different perspective for carbonylation with CO2.