N2O decomposition catalyzed by oxidized Fe clusters localized in the micropores of Fe/ZSM-5 has been studied using the DFT approach and a binuclear cluster model of the active site. Three different reaction routes were found, depending on temperature and water pressure. The results show that below 200 degreesC the binuclear cluster is hydroxylated and is probably inactive. Above this temperature and up to 500 degreesC the catalytic site has the [HO-Fe-O-Fe-OH](2+) structure, and above 500 degreesC the site is predominantly [Fe-O-Fe](2+). The reaction paths on the latter two forms of the site are similar. N2O dissociates on each of the Fe ions with subsequent oxygen recombination and desorption. Some of the side reactions including NO formation are also considered.