The reaction pathway and energetics for the hydroxylation of L-phenylalanine to L-tyrosine are analyzed by a combined quantum mechanical/molecular mechanical (QM/MM) method and a conventional QM method. A reasonable model for the oxygen species responsible for the catalytic reactivity of phenylalanine hydroxylase (PAH) is proposed. The active site model of PAH is a catalytic domain model (including 5176 atoms), which is a truncated form of PAH lacking the N-terminal regulatory and C-terminal tetramerization domains. This model can reasonably treat the protein environment via nonbonding interactions between the QM (iron active site and substrate) and MM (catalytic domain) regions. The QM region involves an iron-oxo species (Fe-IV= O), side-chain ligands of His285, His290, and Glu330, and two water molecules at the binding site of the catalytic active center. Possible reaction pathways are discussed. One is a reaction initiated by a C-H bond cleavage via an H-atom abstraction, followed by a C-O bond formation leading to an L-tyrosine complex. Another is a reaction initiated by an oxygen insertion via electrophilic aromatic addition, followed by the 1,2 hydride shift leading to the keto form (2,4-cyclohexadienone) of the L-tyrosine complex. The structures of the reactant complex, the radical intermediate, and the product complex with the catalytic domain are described. QM/MM calculations tell us that the substrate-binding site in PAH is located at Pro279 and Val379. As a result of QM calculations, the activation energies for the C-H cleavage step and the C-O bond formation in the first mechanism are 24.6 and 9.2 kcal/mol, respectively, while the activation energy for the 1,2 hydride shift in the second one is 9.0 kcal/mol relative to the arenium intermediate. Thus, the QM calculations suggest that the oxygen insertion mechanism is energetically more favorable.