What is the mechanism by which lactones are hydrolyzed during a Wolff-Kishner reaction?
This is a general feature of the hydrazine reagent that is employed in Wolff-Kishner reductions. When attacking an ester’s (includes lactone’s) carbonyl function, the generated tetrahedric intermediate can break down to form a hydrazide as shown in the scheme below.



The carbonyl function is not reduced but the ester (or lactone) is hydrazinolysed.

One could assume that the displace alcoholate could reattack the carbonyl group to regenerate the ester/lactone. However, apart from hydrazine being much more nucleophilic than alcoholates, the resulting hydrazide is also stabilised much like an amide, and is therefore less reactive.