The palladium-catalyzed cyclopropanation of olefins has been investigated at the DFT-(B3LYP) computational level. The model system is formed by an ethylene molecule and the active catalytic species, which forms from a CH2 fragment and the Cl2Pd(PH3)(2) complex. The results can be summarized as follows: (i) The active catalytic species is not a metal-carbene of the type (PH3)(2)Cl2Pd=CH2, as commonly assumed, but a carbenoid complex which can exist in two almost degenerate forms, (PH3)(2)Pd(CH2Cl)Cl and (PH3)Cl2Pd(CH2PH3). (ii) The cyclopropanation can proceed either along concerted or multistep reaction pathways. (iii) The nonconcerted paths involve the formation of palladacyclobutane intermediates as indicated by the experimental evidence. (iv) The stereochemical outcome expected on the basis of the model system used here is in agreement with the experimental results (retention of the olefin configuration). (v) Sterically less hindered cyclopropane products should be favored when bulky groups are involved on the olefin and carbenoid moieties.