Catalysis of the reaction: 7,8-dihydroxykynurenate + O2 = 5-(3-carboxylato-3-oxoprop-1-en-1-yl)-4,6-dihydroxypyridine-2-carboxylate + H+.
7,8-dihydroxykynurenate:oxygen 8,8a-oxidoreductase (decyclizing)