Whether p27 is a cyclin D-cdk4/6 inhibitor or not is controversial, and how it might switch between these two modes is unknown. Arguing for a two-state mechanism, we show that p27 bound to cyclin D-cdk4 can be both inhibitory and noninhibitory, due to its differential-growth-state-dependent tyrosine phosphorylation. We found that p27 from proliferating cells was noninhibitory but that p27 from arrested cells was inhibitory, and the transition from a bound noninhibitor to a bound inhibitor was not due to an increase in p27 concentration. Rather, two tyrosine residues (Y88 and Y89) in p27's cdk interaction domain were phosphorylated preferentially in proliferating cells, which converted p27 to a noninhibitor. Concordantly, mutation of these sites rendered p27 resistant to phosphorylation and locked it into the bound-inhibitor mode in vivo and in vitro. Y88 was directly phosphorylated in vitro by the tyrosine kinase Abl, which converted p27 to a cdk4-bound noninhibitor. These data show that the growth-state-dependent tyrosine phosphorylation of p27 modulates its inhibitory activity in vivo.