Signal transduction events are often mediated by small protein domains such as SH2 (Src homology 2) domains that recognize phosphotyrosines (pY) and flanking sequences. In case of the SHP-2 receptor tyrosine phosphatase an N-terminal SH2 domain binds and inactivates the phosphatase (PTP) domain. The pY-peptide-binding site on the N-terminal SH2 domain does not overlap with the PTP binding region. Nevertheless, pY-peptide binding causes domain dissociation and phosphatase activation. Comparative multi-nanosecond molecular dynamics simulations on the N-SH2 domain in ligand-bound and free states have been performed to study the allosteric mechanism that leads to domain dissociation upon pY-peptide binding. Significant ligand-dependent differences in the conformational flexibility of regions that are involved in SH2-PTP domain association have been observed. The results support a mechanism of signal transduction where SH2-peptide binding modulates the domain flexibility and reduces its capacity to fit into the entrance of the PTP catalytic domain of SHP-2.