Ultraviolet (UV) component of sunlight irradiation causes the major DNA damage by inducing the formation of cyclobutane pyrimidine dimer (CPD), which is mutagenic and a leading cause of skin cancer. Photolyase uses blue light to completely restore this lesion to two normal bases by splitting the cyclobutane ring. Our earlier studies showed that the overall repair is completed in 700 ps through a cyclic electron-transfer (ET) mechanism. However, the two fundamental processes, electron tunneling pathways and cyclobutane ring splitting, were not resolved. Here, we use ultrafast UV absorption spectroscopy to show that the CPD splits in two sequential steps within 90 ps and the electron tunnels between the cofactor and substrate through a remarkable route with an intervening adenine. Site-directed mutagenesis reveals that the active-site residues are critical to achieving high repair efficiency, a unique electrostatic environment to optimize the redox potentials and local flexibility, and thus balance all catalytic reactions to maximize enzyme activity. These key findings reveal the complete spatio-temporal molecular picture of CPD repair by photolyase and elucidate the underlying molecular mechanism of the enzyme’s high repair efficiency.