A hybrid QM/MM method that combines ab initio valence-bond (VB) with molecular mechanics (MM) is presented. The method utilizes the ab initio VB approach to describe the reactive fragments and MM to describe the environment thus allows VB calculations of reactions in large biological systems. The method, termed density embedded VB/MM (DE-VB/MM), is an extension of the recently developed VB/MM method. It involves calculation of the electrostatic interaction between the reactive fragments and their environment using the electrostatic embedding scheme. Namely, the electrostatic interactions are represented as one-electron integrals in the ab initio VB Hamiltonian, hence taking into account the wave function polarization of the reactive fragments due to the environment. Moreover, the assumptions that were utilized in an earlier version of the method, VB/MM, to formulate the electrostatic interactions effect on the off-diagonal matrix elements are no longer required in the DE-VB/MM methodology. Using DE-VB/MM, one can calculate, in addition to the adiabatic ground state reaction profile, the energy of the diabatic VB configurations as well as the VB state correlation diagram for the reaction. The abilities of the method are exemplified on the identity SN2 reaction of a chloride anion with methyl chloride in aqueous solution. Both the VB configurations diagram and the state correlation diagram are presented. The results are shown to be in very good agreement with both experimental and other computational data, suggesting that DE-VB/MM is a proper method for application to different reactivity problems in biological systems.