A nonadiabatic hybrid quantum and molecular mechanical (na-QM/MM) molecular dynamics scheme has been implemented recently combining the nonadiabatic Car-Parrinello molecular dynamics method by Doltsinis and Marx [Phys. Rev. Lett. 2002, 88, 166402] with the QM/MM coupling approach by Laio et al. [J. Chem. Phys. 2002, 116, 6941]. Here in extensive validation of the underlying, density functional theory based, electronic structure methods by comparison to CASPT2 A initio data is presented for the case of azobenzene. The "on the fly" na-QM/MM method is then applied to study Z -> E and E -> Z photoisomerization of azobenzene in a bulk liquid environment. The isomerization mechanism is found to be a pedal motion of the central CN=NC group in both cases. While the Z -> E reaction is barely affected by the environment, E -> Z photoisomerization is slowed down considerably in the liquid compared to the gas phase. This effect is due to the fact that reorientation of file phenyl rings is significantly hindered in the liquid by steric nearest neighbor interactions. Nonradiative decay is found to be substantially faster for Z-AB (subpicosecond regime) than for E-AB (picosecond regime). The main molecular motions responsible for nonadiabatic coupling have been identified as the oscillations in the NN and CN bond lengths, the CNN bond angles, and the CNNC dihedral angle.