Observations and numerical modeling indicate that a mesoscale anti-cyclonic eddy formed south of Cape Ann at the northern entrance of Massachusetts Bay (MB) during May 2005, when large river discharges in the western Gulf of Maine and two strong Nor'easters passing through the regions led to an unprecedented toxic Alexandrium fundyense bloom (red tide). Both model results and field measurements suggest that the western Maine Coastal Current separated from Cape Ann around May 78, and the eddy formed on around May 10. The eddy was trapped at the formation location for about a week before detaching from the coastline and moving slowly southward on May 17. Both model results and theoretical analysis suggest that the separation of the coastal current from the coast and subsequent eddy formation were initiated at the subsurface by an adverse pressure gradient between Cape Ann and MB due to the higher sea level set up by onshore Ekman transport and higher density in downstream MB. After the formation, the eddy was maintained by the input of vorticity transported by the coastal current from the north, and local vorticity generation around the cape by the horizontal gradients of wind-driven currents, bottom stress, and water density induced by the Merrimack River plume. Observations and model results indicate that the anti-cyclonic eddy significantly changed the pathway of nutrient and biota transport into the coastal areas and enhanced phytoplankton including Alexandrium abundances around the perimeter of the eddy and in the western coast of MB.