This is a review of the enzymatic mechanism of DNA methyltransferase Dnmt1 and analysis of its implications on regulation of DNA methylation in mammalian cells and design of novel mechanism-based inhibitors. The methylation reaction by Dnmt1 has different phases that depend on DNA substrate and allosteric regulation. Consequently, depending on the phase, the differences in catalytic rates between unmethylated and pre-methylated DNA can vary between 30-40 fold, 3-6 fold or only 1 fold. The allosteric site and the active site can bind different molecules. Allosteric activity depends on DNA sequence, methylation pattern and DNA structure (single stranded vs. double stranded). Dnmt1 binds poly(ADP-ribose) and some RNA molecules. The results on kinetic preferences, allosteric activity and binding preference of Dnmt1 are combined together in one comprehensive model mechanism that can address regulation of DNA methylation in cells; namely, inhibition of DNA methylation by poly(ADP-ribose), RNA-directed DNA methylation by methylated and unmethylated non-coding RNA molecules, and transient interactions between Dnmt1 and genomic DNA. Analysis of reaction intermediates showed that equilibrium between base-flipping and base-restacking events can be the key mechanism in control of enzymatic activity. The two events have equal but opposite effect on accumulation of early reaction intermediates and methylation rates. The accumulation of early reaction intermediates can be exploited to improve the current inhibitors of Dnmt1 and achieve inhibition without toxic modifications in genomic DNA. [1,2-dihydropyrimidin-2-one]-5-methylene-(methylsulfonium)-adenosyl is described as the lead compound.