Vanadyl oxide (VO) sites are thought to play a role in a number of industrially important catalysts for activating saturated alkanes, but in no system is the mechanism for the activation, product formation, and reoxidation steps established. In this paper, we use quantum mechanical methods (B3LYP flavor of density functional theory) to examine the detailed mechanism for propane reacting with a V4O10 cluster to model the catalytic oxidative dehydrogenation (ODH) of propane on the V2O5(001) surface. We here report the mechanism of the complete catalytic cycle, including the regeneration of the reduced catalyst using gaseous O-2. The rate-determining step is hydrogen abstraction by the vanadyl (VO) group (in agreement with experiment) to form an iso-propyl radical that binds to an adjacent V-O-V site. Subsequently, this bound iso-propyl forms propene product by beta-hydride elimination to form bound H2O. We find that this H2O (bound to a V-III site) is too stable to desorb unimolecularly. Instead, the desorption is induced by binding of gaseous O-2 to the V-III site, which dramatically decreases the coordination energy of H2O from 37.8 to 12.9 kcal/mol. Further rearrangement of the O-2 molecule leads to formation of a cyclic VO2 peroxide, which activates the C-H bond of a second propane to form a second propene (with a lower reaction barrier). Desorption of this propene regenerates the original V4O10 cluster. We find that all reactions involve the single vanadyl oxygen (VO), with the bridging oxygens (V-O-V) serving to stabilize the iso-propyl radical intermediate. We refer to this mechanism as the single-site vanadyl activation, functionalization, and reoxidation mechanism (SS-VAFR). This SS-VAFR mechanism should be applicable to propane ODH on the supported vanadium oxide catalysts where only monovanadate (VO4) species are present.