The [2+2+1] cycloaddition reaction of 1,4-diazabutadienes, carbon monoxide and ethylene catalyzed by iron carbonyl complexes produces pyrrolidin-2-one derivatives. Only one of the two imine moieties is activated during the catalysis. The mechanism of this cycloaddition reaction is studied by density functional theory at the B3LYP/6-311++G(d,p) level of theory. In accordance with experimental results, a [(diazabutadiene)Fe(CO)(3)] complex of square-pyramidal geometry is used as the starting compound S of the catalytic cycle. Based on experimental experience, the reaction with ethylene is considered to take place before any interaction with carbon monoxide. According to the computational results, the reaction does not proceed by ligand dissociation followed by addition of ethylene and subsequent intramolecular activation steps but by the approach of an ethylene molecule from the base of the square-pyramidal complex. This reaction yields an intermediate I(4) in which ethylene is coordinated to the iron centre and a new C-C bond between ethylene and one of the imine groups is formed. The insertion of a terminal carbon monoxide ligand into the metal-carbon bond between ethylene and iron produces the key intermediate I(7). The reaction proceeds by metal-assisted formation of a lactam P. The catalytic cycle is closed by a ligand-exchange reaction in which the diazabutadiene ligand substitutes P with reformation of S. This reaction pathway is found to be energetically favored over a reductive elimination. It leads to the experimentally observed heterocyclic product P and a reactive [Fe(CO)(3)] fragment.