Utilization of 1,6-anhydro-β-d-glucopyranose (levoglucosan) present (11% w/v) in the water fraction of bio-oil for ethanol production will facilitate improvement in comprehensive utilization of total carbon in biomass. One of the major challenges for conversion of anhydrous sugars from the bio-oil water fraction to bio-ethanol is the presence of inhibitory compounds that slow or impede the microbial fermentation process. Removal of inhibitory compounds was first approached by n-butanol extraction. Optimal ratio of n-butanol and bio-oil water fraction was 1.8:1. Removal of dissolved n-butanol was completed by evaporation. Concentration of sugars in the bio-oil water fraction was performed by membrane filtration and freeze drying. Fermentability of the pyrolytic sugars was tested by fermentation of hydrolyzed sugars with Saccharomyces pastorianus lager yeast. The yield of ethanol produced from pyrolytic sugars in the bio-oil water fraction reached a maximum of 98% of the theoretical yield.