We have performed a detailed analysis of water clustering and percolation in hydrated Nafion configurations generated by classical molecular dynamics simulations. Our results show that at low hydration levels H2O molecules are isolated and a continuous hydrogen-bonded network forms as the hydration level is increased. Our quantitative analysis has established a hydration level (lambda) between 5 and 6 H2O/SO3- as the percolation threshold of Nation. We have also examined the effect of such a network on proton transport by studying the structural diffusion of protons using the quantum hopping molecular dynamics method. The mean residence time of the proton on a water molecule decreases by 2 orders of magnitude when the lambda value is increased from 5 to 15. The proton diffusion coefficient in Nation at a lambda value of 15 is about 1.1 x 10(-5) cm(2)/s in agreement with experiment. The results provide quantitative atomic-level evidence of water network percolation in Nafion and its effect on proton conductivity.