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Substitution of the C2-OH group by C2-H at 4-nitrophenyl-beta-d-galactopyranoside to give 4-nitrophenyl-2-deoxy-beta-d-galactopyranoside causes (1) a change in the rate-determining step for beta-galactosidase-catalyzed sugar hydrolysis from formation to breakdown of a covalent intermediate; (2) a 14 000-fold decrease in the second-order rate constant k(3)/K(d) for enzyme-catalyzed transfer of the beta-d-galactopyranosyl group from the substrate to form a covalent adduct to the enzyme; and (3) a larger 320 000-fold decrease in the first-order rate constant k(s) for hydrolysis of this covalent adduct. Only a small fraction (ca. 7%) of the 2-OH substituent effect is expressed in the ground-state Michaelis complex, so that the (apparent) strong interactions between the enzyme and 2-OH group that stabilize the transition state for beta-d-galactopyranosyl transfer only develop upon moving from the Michaelis complex to the transition state. Mg(2+) activates beta-galactosidase for cleavage of both 4-nitrophenyl-beta-d-galactopyranoside and 4-nitrophenyl-2-deoxy-beta-d-galactopyranoside. This suggests that Mg(2+) activation does not involve interactions with the 2-OH group. The removal of Mg(2+) from beta-galactosidase causes a change in the rate-determining step for enzyme-catalyzed hydrolysis of 4-nitrophenyl-2-deoxy-beta-d-galactopyranoside from breakdown to formation of the covalent intermediate. The observed 2-OH effect would require a very large (10-11 kcal/mol) stabilization of the transition state for beta-d-galactopyranosyl group transfer to water by interactions between beta-galactosidase and the neutral 2-OH group. We suggest that the apparent effect of the neutral substituent is more simply rationalized by ionization of the 2-OH to form a 2-O(-) anion, which provides effective electrostatic stabilization of the cationic transition state for glycoside cleavage at an active site of relatively low dielectric constant.