Density functional theory is used to investigate CO oxidation over an ultrathin MgO film supported on Ag(100). O-2 is found to be activated on MgO/Ag(100) whereas CO is only weakly bonded to the surface. These adsorption properties together with a low activation barrier render the MgO/Ag system an efficient catalyst for CO oxidation at low temperatures. As the predicted mechanism is general in nature, the result is suggested to have implications for a wide range of oxidation reactions.