Protein tyrosine phosphatase 1B (PTP1B) displays a preference for peptides containing acidic as well as aromatic/aliphatic residues immediately NH(2)-terminal to phosphotyrosine. The structure of PTP1B bound with DADEpYL-NH(2) (EGFR(988)(-)(993)) offers a structural explanation for PTP1B's preference for acidic residues [Jia, Z., Barford, D., Flint, A. J., and Tonks, N. K. (1995) Science 268, 1754-1758]. We report here the crystal structures of PTP1B in complex with Ac-ELEFpYMDYE-NH(2) (PTP1B.Con) and Ac-DAD(Bpa)pYLIPQQG (PTP1B.Bpa) determined to 1.8 and 1.9 A resolution, respectively. A structural analysis of PTP1B.Con and PTP1B.Bpa shows how aromatic/aliphatic residues at the -1 and -3 positions of peptide substrates are accommodated by PTP1B. A comparison of the structures of PTP1B.Con and PTP1B.Bpa with that of PTP1B.EGFR(988)(-)(993) reveals the structural basis for the plasticity of PTP1B substrate recognition. PTP1B is able to bind phosphopeptides by utilizing common interactions involving the aromatic ring and phosphate moiety of phosphotyrosine itself, two conserved hydrogen bonds between the Asp48 carboxylate side chain and the main chain nitrogens of the pTyr and residue 1, and a third between the main chain nitrogen of Arg47 and the main chain carbonyl of residue -2. The ability of PTP1B to accommodate both acidic and hydrophobic residues immediately NH(2)-terminal to pTyr appears to be conferred upon PTP1B by a single residue, Arg47. Depending on the nature of the NH(2)-terminal amino acids, the side chain of Arg47 can adopt one of two different conformations, generating two sets of distinct peptide binding surfaces. When an acidic residue is positioned at position -1, a preference for a second acidic residue is also observed at position -2. However, when a large hydrophobic group occupies position -1, Arg47 adopts a new conformation so that it can participate in hydrophobic interactions with both positions -1 and -3.