Inactivation of mitogen-activated protein kinases (MAPKs) by MAPK phosphatases (MKPs) is accomplished via substrate-induced activation of the latter enzymes; however, the structural basis for the underlying mechanism remains elusive. Here, we report the three-dimensional solution structure of the C-terminal phosphatase domain of the prototypical MKP PAC-1, determined when bound to phosphate. Structural and biochemical analyses reveal unique active site geometry of the enzyme important for binding to phosphorylated threonine and tyrosine of MAPK ERK2. Our study further demonstrates that the dynamic interaction between the N-terminal kinase binding domain and the C-terminal phosphatase domain of an MKP is directly coupled to MAPK-induced conformational change of the phosphatase active site, which is essential for eliciting its full enzymatic activity.