Catalysis by protein-tyrosine phosphatase 1B (PTP1B) occurs through a two-step mechanism involving a phosphocysteine intermediate. We have solved crystal structures for the transition state analogs for both steps. Together with previously reported crystal structures of apo-PTP1B, the Michaelis complex of an inactive mutant, the phosphoenzyme intermediate, and the product complex, a full picture of all catalytic steps can now be depicted. The transition state analog for the first catalytic step comprises a ternary complex between the catalytic cysteine of PTP1B, vanadate, and the peptide DADEYL, a fragment of a physiological substrate. The equatorial vanadate oxygen atoms bind to the P-loop, and the apical positions are occupied by the peptide tyrosine oxygen and by the PTP1B cysteine sulfur atom. The vanadate assumes a trigonal bipyramidal geometry in both transition state analog structures, with very similar apical O-O distances, denoting similar transition states for both phosphoryl transfer steps. Detailed interactions between the flanking peptide and the enzyme are discussed.The phosphorylation of tyrosine residues by protein-tyrosine kinases and the reverse action by protein-tyrosine phosphatases (PTPs) 4 is a common mechanism for the control of biological pathways (1-3). Protein-tyrosine phosphatase 1B (PTP1B) is a biomedically important phosphatase with several roles, including negative regulation of insulin signaling by dephosphorylation of the insulin receptor tyrosine kinase (4). Knock-out studies show that loss of PTP1B is associated with an increased insulin sensitivity and suppression of weight gain in mice (5). As a result, this enzyme has been considered a significant target for treatment of type 2 diabetes and obesity (6, 7). PTP1B also down-regulates cell growth by dephosphorylating the epidermal growth factor receptor (8). Overexpression has been observed in human breast and ovarian cancer, where it is believed to suppress potential tumors by antagonizing signaling of oncogenic factors (9, 10). Other PTPs are known virulence factors for a number of human diseases (11-13).Reactions catalyzed by PTPs take place by a ping-pong mechanism ( Fig. 1) (2). In the first step, a nucleophilic cysteine thiolate attacks the phosphate ester moiety of the substrate, resulting in formation of a phosphoenzyme intermediate with release of the peptidyl tyrosine. The second step occurs via attack of water on the phosphoenzyme intermediate and yields the final products inorganic phosphate and the regenerated enzyme. The central binding site for the substrate is the P-loop, a region at the bottom of a pocket that includes the nucleophilic cysteine and backbone amide groups oriented in a horseshoe fashion. The amide protons in the P-loop, together with a conserved arginine residue, hydrogen-bond to the phosphoryl group of the substrate and orient it for nucleophilic attack, providing transition state (TS) stabilization. Substrate binding is followed by conformational changes that culminate with closure of the activ...