Hybrid density functional theory has been used to investigate the catalytic mechanism of methyl-coenzyme M reductase (MCR), an essential enzyme in methanogenesis. In a previous study of methane formation, a scheme was suggested involving oxidation of Ni(I) in the starting square-planar coordination to the high-spin Ni(II) form in the CoM-S-Ni(II)F(430) octahedral intermediate. The methyl radical, concomitantly released by methyl-coenzyme M (CoM), is rapidly quenched by hydrogen atom transfer from the coenzyme B (CoB) thiol group, yielding methane as the first product of the reaction. The present investigation primarily concerns the second and final step of the reaction: oxidation of CoB and CoM to the CoB-S-S-CoM heterodisulfide product and reduction of nickel back to the Ni(I) square-planar form. The activation energy for the second step is found to be around 10 kcal/mol, implying that the first step of methane formation with an activation energy of 20 kcal/mol should be rate-limiting. An oxygen of the Gln147 residue, occupying the rear axial position in the oxidized Ni(II) state, is shown to stabilize the intermediate by 6 kcal/mol, thereby slightly decreasing the barrier for the preceding rate-limiting transition state. The mechanism suggested is discussed in the context of available experimental data. An analysis of the flexibility of the F(430) cofactor during the reaction cycle is also given.