The catalytic mechanism for peptide hydrolysis by thermolysin has been investigated using the B3LYP hybrid density functional method. The starting structure for the calculations was based on the X-ray crystal structure of the enzyme inhibited with the ZF (p)LA phosphonamidate transition-state analogue. Besides the three Zn ligands His142, His146 and Glu166, a few additional residues were also included in the model. Following the order of importance, the outer-sphere ligands Glu143, His231 and Asp226 were shown to play significant catalytic roles, well correlated with results from site-directed mutagenesis experiments. A single-step reaction mechanism was obtained starting from the initial enzyme-substrate complex with a pentacoordinated metal center and proceeding to the enzyme-carboxylate complex as a final product, following a proposal by Matthews and co-workers. The transition state combines a nucleophilic water oxygen attack on the peptide carbon and a proton transfer from the water to the peptide nitrogen, mediated by the Glu143 carboxylate. A free activation energy of 15.2 kcal/mol was obtained, compared to the experimental 12.4-16.3 kcal/mol range for various peptide substrates. An interesting aspect of the present single-step mechanism is that the Glu143 carboxylate moves a significant distance of ~1.0 A. Different chemical models were examined, both related to the system size and proper side-chain modeling. The significance of the protein frame rigidity around the active site was estimated by fixing and subsequently releasing the edge atom positions. Finally, alternative mechanistic proposals are briefly summarized.