The Sir2 family of enzymes is highly conserved throughout evolution and functions in silencing, control of life span, apoptosis, and many other cellular processes. Since the discovery of the NAD-dependent deacetylase activity of Sir2 proteins, there has been a flurry of activity aiming to uncover the mode of substrate binding and catalysis. Structural and biochemical studies have led to several proposed reaction mechanisms, yet the exact catalytic steps remain unclear. Here we present in vitro studies of yeast homolog Hst2 that shed light on the mechanism of Sir2 proteins. Using acetyl-lysine substrate analogs, we demonstrate that the Hst2 reaction proceeds via an initial SN2-type mechanism with the direct formation of an ADP-ribose-acetyl-lysine intermediate. Kinetic studies further suggest that ADP-ribose inhibits the Hst2 reaction in a biologically relevant manner. Through biochemical and kinetic analyses of point mutants, we also clarify the role of several conserved core domain residues in substrate binding, stabilization of the ADP-ribose-acetyl-lysine intermediate, and catalysis. These findings bring us a few steps closer to understanding Sir2 activity and may provide a useful platform for the design of Sir2-specific inhibitors for analysis of Sir2 function and possibly therapeutic applications.