Nanoporous Au and other dilute AgAu alloys are highly active and selective oxidation catalysts. Their ability to dissociate O-2 is to a large extent unexplained, given that unsupported Au cannot generally dissociate O-2 while large ensembles of Ag atoms (>4) are generally necessary to lower the O-2 dissociation barrier significantly. Here, we identify a site on the surface of dilute AgAu alloys that is stable under reaction conditions and has a low O-2 dissociation barrier, in agreement with experimental measurements. Although Ag generally prefers to disperse throughout Au, the presence of adsorbed O near surface steps creates sites of high local Ag concentration, where the Ag, atoms sit in the rows next to the step Au atoms. O-2 adsorbs on the Au step atoms, but the transition state involves significant Ag-O interaction, resulting in a barrier lower than expected from the adsorption energies of either the initial or final state.