An automated method for the dynamic ligand design (DLD) for a binding site of known structure is described. The method can be used for the creation of de novo ligands and for the modification of existing ligands. The binding site is saturated with atoms (sp3 carbon atoms in the present implementation) that form molecules under the influence of a potential function that joins atoms to each other with the correct stereochemistry. The resulting molecules are linked to precomputed functional group minimum energy positions in the binding site. The generalized potential function allows atoms to sample a continuous parameter space that includes the Cartesian coordinates and their occupancy and type, e.g., the method allows change of an sp3 carbon into an sp2 carbon or oxygen. A parameter space formulated in this way can then be sampled and optimized by a variety of methods. In this work, molecules are generated by use of a Monte Carlo simulated annealing algorithm. The DLD method is illustrated by its application to the binding site of FK506 binding protein (FKBP), an immunophilin. De novo ligands are designed and modification of the immunosuppressant drug FK506 are suggested. The results demonstrate that the dynamic ligand design approach can automatically construct ligands which complement both the shape and charge distribution of the binding site.