The Copalillo earthquake of 21 July 2000 (Mw 5.9) is the closest, well-located inslab event to Mexico City ever to be recorded. In this study, we analyze local and regional broadband and accelerometric recordings to determine the source parameters of the earthquake and the attenuation of ground motion with distance and to obtain a preliminary estimate of the seismic hazard posed to the city by such events. Our results show that the earthquake occurred at a depth of about 50 km, most probably in the subducted oceanic crust. The waveform inversion discriminates between the two nodal planes; the fault plane defined by the following: strike, 305°; dip, 32°; and rake, -80°. The rupture propagated nearly unilaterally along the strike toward northwest with a small downdip component. The observed source spectrum can be well explained by an ω2-source model with M0 = 6.0 × 1025 dyne cm and a stress drop of 360 bar. We find that high-frequency ground motion (f > 3 Hz), which is related to Amax during inslab earthquakes, is not amplified at Ciudad Universitaria (CU), a hill-zone site in the Valley of Mexico that is known to suffer amplification at low frequencies (0.1 < f < 2.0 Hz). Simulations using the recording at CU of the Copalillo earthquake as an empirical Green's function suggests that a Mw 7.0 event could give rise to an Amax value of 30-40 gal. The CU recordings indicate that the Amax value of 30 gal could have a return period of about 40 yr, about the same as from shallow-dipping thrust earthquakes along the Mexican subduction zone, which have been regarded as posing the highest hazard for the city. An inslab earthquake with an Amax value of about 40 gal could cause heavy damage to small buildings at certain locations of the city. We conclude that seismic hazard from inslab earthquakes to Mexico City has so far been underestimated.