In the present study, density functional theory (DFT) calculations were performed to investigate the reaction mechanism of methane oxidation catalyzed by ZSM-5-supported binuclear iron species. A variety of binuclear iron sites such as Fe­(μ-O)­Fe2+, Fe­(μ-O)2Fe2+, Fe­(μ-O)­(μ-OH)­Fe+, and HOFe­(μ-O)­FeOH2+ were considered. The conversion of methane to methanol is decomposed into two processes: C–H activation and methanol formation. It is found that the anhydrous Fe­(μ-O)­Fe2+ sites exhibit the lowest reactivity for methane oxidation due to high energy barriers for both C–H activation and methanol formation steps, while the Fe­(μ-O)­(μ-OH)­Fe+ and HOFe­(μ-O)­FeOH2+ sites are found to exhibit higher reactivity for methane oxidation in comparison with the anhydrous sites. This high reactivity is mainly attributed to the presence of the terminal or bridged hydroxyls, which can either provide a significant coordination effect or act as an oxidant for methane oxidation. Moreover, we find that on both Fe­(μ-O)­Fe2+ and Fe­(μ-O)2Fe2+ sites the existence of solvent water molecule can effectively enhance the reactivity of the methanol formation step. Our results confirm the experimental observation of methane oxidation at the low-temperature range (<500 K) and suggest a significant role of water in methane oxidation in Fe/ZSM5 catalyst. This may provide an important guide in designing catalysts with high activity of methane oxidation.