Human dipeptidyl-peptidase III (h.DPP III) is a zinc-exopeptidase that hydrolyses dipeptides from the N-terminus of its substrates. Its mechanism of action was assumed to be similar to that of thermolysin, but was never thoroughly investigated. This study presents the first insight into the reaction mechanism of h.DPP III, determined on the model and real (hydrated enzyme with Leu-enkephalin bound in the active site) systems. The Glu451-assisted water addition on amide carbon atoms and nitrogen inversion (i.e. change of pyramidalization on the leaving nitrogen) are shown to be the rate-determining steps with the activation energies in a good agreement with the experimental results for the Leu-enkephalin hydrolysis. The energy barrier for nucleophilic attack is about 28 kJ mol-1, while barriers for the N-inversion differ as a consequence of the number of hydrogen bonds that have to be changed, which is smaller in the model active site than in the solvated enzyme. Although precisely defined geometry of the enzyme binding site puts an additional restraint on the hydrogen bonding interactions, at the same time it stimulates the forward reaction towards the final hydrolytic product. Namely, different from the model, the N-inversion is in a concerted fashion followed by favourable hydrogen bonding with Glu451 that immediately "locks" the system into the configuration where reversion to the enzyme-substrate complex is hardly achievable. Therefore we propose that the functional significance of DPP III is dual: to lower the energy barrier of the peptide hydrolysis and to suppress the reverse reaction.