The mechanism for methane formation in methyl-coenzyme M reductase (MCR) has been investigated using the B3LYP hybrid density functional method and chemical models consisting of 107 atoms. The experimental X-ray crystal structure of the enzyme in the inactive MCRox1-silent state was used to set up the initial model structure. The calculations suggest a mechanism not previously proposed, in which the most remarkable feature is the formation of an essentially free methyl radical at the transition state. The reaction cycle suggested starts from a Michaelis complex with CoB and methyl-CoM coenzymes bound and with a squareplanar coordination of the Ni(I) center in the tetrapyrrole F-430 prosthetic group. In the rate-limiting step the methyl radical is released from methyl-CoM, induced by the attack of Ni(l) on the methyl-CoM thioether sulfur. In this step, the metal center is oxidized from Ni(I) to Ni(II). The resulting methyl radical is rapidly quenched by hydrogen-atom transfer from the COB thiol group, yielding the methane molecule and the COS radical. The estimated activation energy is around 20 kcal/mol, which includes a significant contribution from entropy due to the formation of the free methyl. The mechanism implies an inversion of configuration at the reactive carbon. The size of the inversion barrier is used to explain the fact that CF3-S-COM is an inactive substrate. Heterodisulfide CoB-S-S-CoM formation is proposed in the final step in which nickel is reduced back to Ni(I), The suggested mechanism agrees well with experimental observations.