DNA polymerases play a crucial role in the cell cycle due to their involvement in genome replication and repair. Understanding the reaction mechanism by which these polymerases carry out their function can provide insights into these processes. Recently, the crystal structures of human DNA polymerase lambda (Pollambda) have been reported both for pre- and post-catalytic complexes [García-Díaz et al., DNA Repair 3 (2007), 1333]. Here we employ the pre-catalytic complex as a starting structure for the determination of the catalytic mechanism of Pollambda using ab initio quantum mechanical/molecular mechanical methods. The reaction path has been calculated using Mg(2+) and Mn(2+) as the catalytic metals. In both cases the reaction proceeds through a two-step mechanism where the 3'-OH of the primer sugar ring is deprotonated by one of the conserved Asp residues (D490) in the active site before the incorporation of the nucleotide to the nascent DNA chain. A significant charge transfer is observed between both metals and some residues in the active site as the reaction proceeds. The optimized reactant and product structures agree with the reported crystal structures. In addition, the calculated reaction barriers for both metals are close to experimentally estimated barriers. Energy decomposition analysis to explain individual residue contributions suggests that several amino acids surrounding the active site are important for catalysis. Some of these residues, including R420, R488 and E529, have been implicated in catalysis by previous mutagenesis experiments on the homologous residues on Polbeta. Furthermore, Pollambda residues R420 and E529 found to be important from the energy decomposition analysis, are homologous to residues R183 and E295 in Polbeta, both of which are linked to cancer. In addition, residues R386, E391, K422 and K472 appear to have an important role in catalysis and could be a potential target for mutagenesis experiments. There is partial conservation of these residues across the Pol X family of DNA polymerases.