The Peregrine breather, today widely regarded as a prototype for spatio-temporally localized rogue waves on the ocean caused by nonlinear focusing, is analyzed by direct numerical simulations based on two-phase Navier-Stokes equations. A finite-volume approach with a volume of fluid method is applied to study the Peregrine breather dynamics up to the initial stages of wave breaking. The comparison of the numerical results with laboratory experiments to validate the numerical approach shows very good agreement and suggests that the chosen method is an effective tool to study modulation instability and breather dynamics in water waves with high accuracy even up to the onset of wave breaking. The numerical results also indicate some previously unnoticed characteristics of the flow fields below the water surface of breathers, which might be of significance for short-term prediction of rogue waves. Recurrent wave breaking is also observed.