We report characterization and the crystal structure of the Mycobacterium tuberculosis cytochrome P450 CYP125, a P450 implicated in metabolism of host cholesterol and essential for establishing infection in mice. CYP125 is purified in a high spin form and undergoes both type I and II spectral shifts with various azole drugs. The 1.4-angstrom structure of ligand-free CYP125 reveals a "letterbox" active site cavity of dimensions appropriate for entry of a polycyclic sterol. A mixture of hexa-coordinate and penta-coordinate states could be discerned, with water binding as the 6th heme-ligand linked to conformation of the I-helix Val(267) residue. Structures in complex with androstenedione and the antitubercular drug econazole reveal that binding of hydrophobic ligands occurs within the active site cavity. Due to the funnel shape of the active site near the heme, neither approaches the heme iron. A model of the cholesterol CYP125 complex shows that the alkyl side chain extends toward the heme iron, predicting hydroxylation of cholesterol C27. The alkyl chain is in close contact to Val(267), suggesting a substrate binding-induced low-to high-spin transition coupled to reorientation of the latter residue. Reconstitution of CYP125 activity with a redox partner system revealed exclusively cholesterol 27-hydroxylation, consistent with structure and modeling. This activity may enable catabolism of host cholesterol or generation of immunomodulatory compounds that enable persistence in the host. This study reveals structural and catalytic properties of a potential M. tuberculosis drug target enzyme, and the likely mode by which the host-derived substrate is bound and hydroxylated.