The mechanism of action of inosine-adenosine-guanosine nucleoside hydrolase (IAG-NH) has been investigated by long-term molecular dynamics (MD) simulation in TIP3P water using stochastic boundary conditions. Special attention has been given to the role of leaving group pocket residues and conformation of the bound substrate at the active site of IAG-NH. We also describe the positioning of the residues of an important flexible loop at the active site, which was previously unobservable by X-ray crystallography due to high B-factors. Five MD simulations have been performed with the Enzyme x Substrate complexes: Enzyme x anti-Adenosine with Asp40-COOH [E(40H) x Ade(a)], Enzyme x anti-Adenosine with Asp40-COO- [E(40) x Ade(a)], Enzyme x syn-Adenosine with Asp40-COOH [E(40H) x Ade(s)], Enzyme x syn-Adenosine with Asp40-COO- [E(40) x Ade(s)], and Enzyme x anti-Inosine with Asp40-COO- [E(40) x Ino(a)]. Overall, the structures generated from the MD simulation of E(40H) x Ade(s) preserve the catalytically important hydrogen bonds as well as electrostatic and hydrophobic interactions to provide a plausible catalytic structure. When deprotonated Asp40 (Asp4-COO-) is present, the active site is open to water solvent which interferes with the base stacking between Trp83 and nucleobase. A calculation using Poisson-Boltzmann equation module supports that Asp40 indeed has an elevated pK(app). Solvent accessible surface area (SASA) calculations on all the five MD structures shows that systems with protonated Asp40, namely, E(40H) x Ade(a) and E(40H) x Ade(s), have zero SASA. It is found that a water molecule is hydrogen-bonded to the N7 of the nucleobase and is probably the essential general acid to protonate the departing nucleobase anion. The N7-bonded water is in turn hydrogen-bonded to waters in a channel, held in place by the residues of the flexible loop, Tyr257, His247, and Cys245. Using normal-mode analysis with elastic network model, we find that the flexible loop explores a conformational space much larger than in the MD trajectory, leading to a "gating"-like motion with respect to the active site.