We have computed a state-of-the-art benchmark potential energy surface (PES) for the archetypal oxidative addition of the chloromethane C-Cl bond to the palladium atom and have used this to evaluate the performance of 26 popular density functionals, covering LDA, GGA, meta-GGA, and hybrid density functionals, for describing this reaction. The ab initio benchmark is obtained by exploring the PES using a hierarchical series of ab initio methods [HF, MP2, CCSD, and CCSD(T)] in combination with a hierarchical series of seven Gaussian-type basis sets, up to g polarization. Relativistic effects are taken into account through a full four-component all-electron approach. Our best estimate of kinetic and thermodynamic parameters is -11.2 (-10.8) kcal/mol for the formation of the most stable reactant complex, 3.8 (2.7) kcal/mol for the activation energy of direct oxidative insertion (OxIn), and -28.0 (-28.8) kcal/mol for the reaction energy (all energies relative to separate reactants, zero-point vibrational energy-corrected values in parentheses). Our work highlights the importance of sufficient higher angular momentum polarization functions for correctly describing metal-d-electron correlation. The best overall agreement with our ab initio benchmark is obtained by functionals from all three categories, GGA, meta-GGA, and hybrid DFT, with mean absolute errors of 0.8-3.0 kcal/mol and errors in activation energies for OxIn ranging from 0.0 to 1.2 kcal/mol. For example, three well-known functionals, BLYP, OLYP, and B3LYP, compare very reasonably with, respectively, an underestimation of the barrier for OxIn of -4.2 kcal/mol and overestimations of 4.2 and 1.6 kcal/mol. Interestingly, all important features of the CCSD(T) benchmark potential energy surfaces for the Pd-induced activation of C-H, C-C, C-F, and C-Cl bonds are reproduced correctly within a few kcal/mol by BLYP, OLYP, and B3LYP, while at the same time, none of these functionals is the "best one" in each individual case. This follows from an overall comparison of the results of the present as well as previous studies. © 2006 American Chemical Society.