Adenylyl cyclase (AC) catalyzes the synthesis of cyclic AMP, an important intracellular regulatory molecule, from ATP. We propose a catalytic mechanism for class III mammalian AC based on density functional theory calculations. We employ a model of the AC active site derived from a crystal structure of mammalian AC activated by Gα·GTP and forskolin at separate allosteric sites. We compared the calculated activation free energies for 13 possible reaction sequences involving proton transfer, nucleophilic attack, and elimination of pyrophosphate. The proposed most probable mechanism is initiated by deprotonation of 3'OH and water-mediated transfer of the 3'H to the γ-phosphate. Proton transfer is followed by changes in coordination of the two magnesium ion cofactors and changes in the conformation of ATP to enhance the role of 3'O as a nucleophile and to bring 3'O close to Pα. The subsequent phosphoryl transfer step is concerted and rate-limiting. Comparison of the enzyme-catalyzed and nonenzymatic reactions reveals that the active site residues lower the free energy barrier for both phosphoryl transfer and proton transfer and significantly shift the proton transfer equilibrium. Calculations for mutants K1065A and R1029A demonstrate that K1065 plays a significant role in shifting the proton transfer equilibrium, whereas R1029 is important for making the transition state of concerted phosphoryl transfer tight rather than loose.