The usual rate-determining step in the catalytic mechanism of the low molecular weight tyrosine phosphatases involves the hydrolysis of a phosphocysteine intermediate. To explain this hydrolysis, general base-catalyzed attack of water by the anion of a conserved aspartic acid has sometimes been invoked. However, experimental measurements of solvent deuterium kinetic isotope effects for this enzyme do not reveal a rate-limiting proton transfer accompanying dephosphorylation. Moreover, base activation of water is difficult to reconcile with the known gas-phase proton affinities and solution phase pK(a)'s of aspartic acid and water. Alternatively, hydrolysis could proceed by a direct nucleophilic attack by a water molecule. To understand the hydrolysis mechanism, we have used high-level density functional methods of quantum chemistry combined with continuum electrostatics models of the protein and the solvent. Our calculations do not support a catalytic activation of water by the aspartate. Instead, they indicate that the water oxygen directly attacks the phosphorus, with the aspartate residue acting as a H-bond acceptor. In the transition state, the water protons are still bound to the oxygen. Beyond the transition state, the barrier to proton transfer to the base is greatly diminished; the aspartate can abstract a proton only after the transition state, a result consistent with experimental solvent isotope effects for this enzyme and with established precedents for phosphomonoester hydrolysis.