The crystal structures of a cysteine-215 --> serine mutant of protein tyrosine phosphatase 1B complexed with high-affinity peptide substrates corresponding to an autophosphorylation site of the epidermal growth factor receptor were determined. Peptide binding to the protein phosphatase was accompanied by a conformational change of a surface loop that created a phosphotyrosine recognition pocket and induced a catalytically competent form of the enzyme. The phosphotyrosine side chain is buried within the protein and anchors the peptide substrate to its binding site. Hydrogen bonds between peptide main-chain atoms and the protein contribute to binding affinity, and specific interactions of acidic residues of the peptide with basic residues on the surface of the enzyme confer sequence specificity.