Water is essential for the stability and functions of proteins and DNA. Reverse micelles are simple model systems where the structure and dynamics of water are controlled. We have estimated the size of complex reverse micelles by light scattering technique and examined the local microenvironment using fluorescein as molecular probe. The micelle size and water polarity inside reverse micelles depend on water volume fraction. We have investigated the different hydration and confinement effects on activity, processivity, and stability of mammalian DNA polymerase beta in reverse micelles. The enzyme displays high processivity on primed single-stranded M13mp19 DNA with maximal activity at 10% of water content. The processivity and activity of DNA polymerase strongly depend on the protein concentration. The enzyme reveals also the enhanced stability in the presence of template-primer and at high protein concentration. The data provide direct evidence for strong influence of microenvironment on DNA polymerase activity.