Molecular dynamics (MD) and free energy perturbation (FEP) methods are used to study the binding and mechanism of isomerization of a tetrapeptide (AcAAPFNMe) by FK506 binding protein (FKBP). Detailed structures are predicted for the complexes of FKBP with the peptide in both ground-state and transition-state forms. The results support a mechanism of catalysis by distortion, where a large number of nonbonded interactions act together to stabilize preferentially the twisted transition state. The two most important groups for the catalysis are suggested to be Trp59 and Asp37, but several other groups are identified as directly or indirectly involved in the binding and catalysis. However, the structural results do not support the notion that the keto oxygen of the immunosuppressive agents FK506 and rapamycin mimics the oxygen for the twisted peptide bond in the FKBP-transition-state complex.