A b s t r a c t . We prove t h a t intermediate Banach spaces A and /3 with respect to arbitrary Hilbert couples 7~ and K~ are exact interpolation if and only if they are exact K-monotonic, i.e. the condition f0 C ~4 and t he inequality K(t, 9 o ;/C) _< K(t, f0 ; "H), t > 0, imply g o E/3 and I It~ II ~ <-II f0 II A ( K is Peetre's K-functional). It is well known t h a t this property is implied by the following: for each g > l there exists an operator T:7/--+/C such t h a t Tf~ ~ and K(t, Tf;1C)<_~gK(t,f;~), f~J{0q-~]-L1, t > 0 . Verifying the latter property, it suffices to consider the "diagonal case" where ?-t=/C is finite-dimensional, in which case we construct the relevant operators by a m e t h o d which allows us to explicitly calculate them. In the strongest form of the theorem, it is shown t h a t the s t a t e m e n t remains valid w h e n s u b s t i t u t i n g ~)=1. The result leads to a short proof of Donoghue's theorem on interpolation functions, as well as LSwner's t h e o r e m on monotone matrix functions.