Microbial populations can maximize fitness in dynamic environments through bet hedging, a process wherein a subpopulation assumes a phenotype not optimally adapted to the present environment but well adapted to an environment likely to be encountered. Here we show that oxygen induces fluctuating expression of the trimethylamine oxide (TMAO) respiratory system of Escherichia coli, diversifying the cell population and enabling a bet-hedging strategy that permits growth following oxygen loss. This regulation by oxygen affects the variance in gene expression but leaves the mean unchanged. We show that the oxygen-sensitive transcription factor IscR is the key regulator of variability. Oxygen causes IscR to repress expression of a TMAO-responsive signaling system, allowing stochastic effects to have a strong effect on the output of the system and resulting in heterogeneous expression of the TMAO reduction machinery. This work reveals a mechanism through which cells regulate molecular noise to enhance fitness. Further regulation of TMAO reductase expression is introduced during lysogenic infection by bacteriophage HK022. The HK022 prophage completely suppresses aerobic TMAO reductase expression, also by altering expression of the TMAO-responsive signaling system, and infected cells lose bet-hedging behavior. The prophage appears to control expression of the signaling system by disrupting a host promoter and replacing it with a prophage-encoded promoter. HK022-like prophages occur with some regularity in wild E. coli strains and may be important environmental regulators of TMAO respiration. These findings provide an unusual example of bacteriophage-host interaction in which a prophage reconfigures the regulation of a host metabolic process by rewiring the transcriptional control of a host gene.