SznF is a nonheme diiron-dependent enzyme that catalyzes the critical N-nitrosation involved in the formation of the N-nitrosourea moiety in the pancreatic cancer drug streptozotocin. The N-nitrosation contains two successive N-hydroxylation and N-nitrosation steps, which are carried out by two separate active sites, namely, the central domain and cupin domain. Recently, the crystal structure of SznF was obtained, and the central domain was proved to contain a diiron cofactor to catalyze the N-hydroxylation. In this work, to gain insights into the O2 activation and the successive N-hydroxylation mechanism, on the basis of the high-resolution crystal structure, the enzyme-substrate complex models were constructed, and a series of combined QM/MM calculations were performed. Based on our calculations, the activation of O2 starts from the diiron(II,III)-superoxo (S) to generate the diiron(IV)-oxo species (Q) via a diiron(III,III)-peroxo (P)-like transition state or unstable intermediate (P'), and species P' can be described as a hybridization of diiron(IV)-oxo species and diiron(III,III)-peroxo (P) owing to the long distances of Fe1-Fe2 (4.22 Å) and O1-O2 (1.89 Å), which is different from those of other nonheme diiron enzymes. In the following hydroxylation of Nδ and Nε, the Nδ-hydroxylation was confirmed to occur first, agreeing with the experimental observations. Because the diiron(IV)-oxo species (Q) is responsible for hydroxylation, the reaction follows the H-abstraction/OH rebound mechanism, and the first abstraction occurs on the Nδ-H rather than Nε-H, which may be attributed to the different orientation of Fe(IV)-oxo relative to N-H as well as the bond dissociation enthalpies of two N-H bonds. The hydroxylation of N-methyl-L-arginine does not employ the diiron(III,III)-hydroperoxo (P″) to trigger the electrophilic attack of the guanidine to directly form the N-O bond, as previously suggested. In addition, our calculations also revealed that the direct attack of the Fe(IV)═O unit to the Nδ of the substrate corresponds to a higher barrier than that in the H-abstraction/OH rebound mechanism. These results may provide useful information for understanding the formation of the di-hydroxylation intermediate involved in the biosynthesis of N-nitrosation.