Despite extensive experimental and theoretical studies, the detailed catalytic mechanism of orotidine 5'-monophosphate decarboxylase (ODCase) remains controversial. In particular simulation studies using high level quantum mechanics have failed to reproduce experimental activation free energy. One common feature of many previous simulations is that there is a water molecule in the vicinity of the leaving CO2 group whose presence was only observed in the inhibitor bound complex of ODCase/BMP. Various roles have even been proposed for this water molecule from the perspective of stabilizing the transition state and/or intermediate state. We hypothesize that this water molecule is not present in the active ODCase/OMP complex. Based on QM/MM minimum free energy path simulations with accurate density functional methods, we show here that in the absence of this water molecule the enzyme functions through a simple direct decarboxylation mechanism. Analysis of the interactions in the active site indicates multiple factors contributing to the catalysis, including the fine-tuned electrostatic environment of the active site and multiple hydrogen-bonding interactions. To understand better the interactions between the enzyme and the inhibitor BMP molecule, simulations were also carried out to determine the binding free energy of this special water molecule in the ODCase/BMP complex. The results indicate that the water molecule in the active site plays a significant role in the binding of BMP by contributing similar to -3 kcal/mol to the binding free energy of the complex. Therefore, the complex of BMP plus a water molecule, instead of the BMP molecule alone, better represents the tight binding transition state analogue of ODCase. Our simulation results support the direct decarboxylation mechanism and highlight the importance of proper recognition of protein bound water molecules in the protein-ligand binding and the enzyme catalysis.