A combined quantum mechanical and molecular mechanical (QM/MM) method (AM1/CHARMM) was used to investigate the mechanism of the aromatic hydroxylation of phenol by a flavin dependent phenol hydroxylase (PH), an essential reaction in the degradation of a wide range of aromatic compounds. The model for the reactive flavin intermediate (C4a-hydroperoxyflavin) bound to PH was constructed on the basis of the crystal structure of the enzyme-substrate complex. A potential energy surface (PES) was calculated as a function of the reaction coordinates for hydroxylation of phenol (on C6) and for proton transfer from phenol (O1) to an active-site base Asp54 (OD1). The results support a reaction mechanism in which phenol is activated through deprotonation by Asp54, after which the phenolate is hydroxylated through an electrophilic aromatic substitution. Ab initio test calculations were performed to verify these results of the QM/MM model. Furthermore, the variation in the calculated QM/MM activation energies for hydroxylation of a series of substrate derivatives was shown to correlate very well (R = 0.98) with the natural logarithm of the experimental rate constants for their overall conversion by PH (25 C, pH 7.6). This correlation validates the present QM/MM model and supports the proposal of an electrophilic aromatic substitution mechanism in which the electrophilic attack of the C4a-hydroperoxyflavin cofactor on the activated (deprotonated) substrate is the rate-limiting step at 25 C and pH 7.6. The correlation demonstrates the potential of the QM/MM technique for predictions of catalytic activity on the basis of protein structure. Analysis of the residue contributions identifies a catalytic role for the backbone carbonyl of a conserved proline residue, Pro364, in specific stabilization of the transition state for hydroxylation. A crystal water appears to assist in the hydroxylation reaction by stabilizing the deprotonated C4a-hydroxyflavin product. Comparison of the present results with previous QM/MM results for the related p-hydroxybenzoate hydroxylase (Ridder et al. J. Am. Chem. Soc. 1998, 120, 7641-7642) identifies common mechanistic features, providing detailed insight into the relationship between these enzymes.