Calculations of the free energy profile for the first two (rate-limiting) steps of the staphylococcal nuclease catalyzed reaction are reported. The calculations are based on the empirical valence bond method in combination with free energy perturbation molecular dynamics simulations. The calculated activation free energy is in good agreement with experimental kinetic data, and the catalytic effect of the enzyme is reproduced without any arbitrary adjustment of parameters. The enormous reduction of the activation barrier (relative to the reference reaction in water) appears to be largely associated with the strong electrostatic effect of the Ca2+ ion and the two arginine residues in the active site. This favorable electrostatic environment reduces the cost of the general-base catalysis step by almost 15 kcal/mol (by stabilizing the OH- nucleophile) and then stabilizes the developing negative charge on the 5'-phosphate group in the second step of the reaction by about 19 kcal/mol. The basic features of the originally postulated enzyme mechanism (Cotton et al., 1979) are found to be compatible with the observed activation free energy. However, the proposed modification of the mechanism (Sepersu et al., 1987), in which Arg 87 interacts only with the pentacoordinated transition state, is supported by the simulations. Further calculations on the D21E mutant also give results in good agreement with kinetic data.