Phosphonoacetaldehyde hydrolase (phosphonatase) catalyzes the hydrolytic P-C bond cleavage of phosphonoacetaldehyde (Pald) to form orthophosphate and acetaldehyde. The reaction proceeds via a Schiff-base intermediate formed between Lys-53 and the Pald carbonyl. The x-ray crystal structures of the wild-type phosphonatase complexed with Mg(II) alone or with Mg(II) plus vinylsulfonate (a phosphonoethylenamine analog) were determined to 2.8 and 2.4 A, respectively. These structures were used to determine the identity and positions of active site residues surrounding the Lys-53 ammonium group and the Pald carbonyl. These include Cys-22, His-56, Tyr-128, and Met-49. Site-directed mutagenesis was then employed to determine whether or not these groups participate in catalysis. Based on rate contributions, Tyr-128 and Cys-22 were eliminated as potential catalytic groups. The Lys-53 epsilon-amino group, positioned for reaction with the Pald carbonyl, forms a hydrogen bond with water 120. Water 120 is also within hydrogen bond distance of an imidazole nitrogen of His-56 and the sulfur atom of Met-49. Kinetic constants for mutants indicated that His-56 (1000-fold reduction in k(cat)/K(m) upon Ala substitution) and Met-49 (17,000-fold reduction in k(cat)/K(m) upon Leu substitution) function in catalysis of Schiff-base formation. Based on these results, it is proposed that a network of hydrogen bonds among Lys-53, water 120, His-56, and Met-49 facilitate proton transfer from Lys-53 to the carbinolamine intermediate. Comparison of the vinylsulfonate complex versus unliganded structures indicated that association of the cap and core domains is essential for the positioning of the Lys-53 for attack at the Pald carbonyl and that substrate binding at the core domain stabilizes cap domain binding.