Cytochrome P450BM3 is a self-sufficient soluble fatty acid hydroxylase from Bacillus megaterium utilizing tightly bound FAD and FMN cofactors to transfer reducing equivalents from NADPH to the heme active site. Active-inactive transitions of cytochrome P450BM3 were exploited to identify catalytic intermediates of the enzyme. Shortly upon reduction by NADPH, a two-electron reduced active P450BM3 is formed with two flavin semiquinones, anionic and neutral, present simultaneously. P450BM3 inactivated by NADPH has a three-electron reduced flavoprotein domain. NADPH is unable to reduce P450BM3 rapidly unless the flavoprotein domain is fully oxidized. During steady-state hydroxylation of a poor substrate, tetradecanol, the flavoprotein reduction state does not exceed two, with two flavin semiquinones, anionic and neutral, present. Absorbance and EPR spectroscopic characterization of both anionic and neutral flavin semiquinone is presented. NADPH and NADH were compared as electron donors for P450BM3-catalyzed fatty acid hydroxylation and cytochrome c and heme iron reduction. The Km for NADH of 3-5 mM is about 3000 times higher than the Km of 1-1.5 microM for NADPH. Although NADH can support cytochrome c reduction and fatty acid hydroxylation with the rates as high as 22 and 13 s-1, respectively, these turnover numbers are only about 20% of those observed with NADPH. The results suggest that nucleotide binding plays an important role in catalysis by controlling electron-transfer properties of the flavin cofactors. In W574G and G570D mutant P450BM3 enzymes that are deficient in FMN, NADP+ binding stabilizes fully reduced FAD. P450BM3 catalyzes single-turnover and steady-state laurate hydroxylation with near stoichiometric product formation at NADPH concentrations below that of the enzyme. A mechanism of electron transfer by the flavoprotein domain of P450BM3 is proposed with the reduction state of the flavoprotein domain cycling in a 0-2-1-0 sequence. We also propose that an interaction of bound NADP+ with anionic FAD semiquinone is essential for splitting a pair of electrons that are then transferred in two one-electron transfer steps to the heme catalytic site.