Protein-tyrosine phosphatases (PTPases) form a large family of enzymes that serve as key regulatory components in signal transduction pathways. Defective or inappropriate regulation of PTPase activity leads to aberrant tyrosine phosphorylation, which contributes to the development of many human diseases including cancers and diabetes. For example, recent gene knockout studies in mice identify PTP1B as a promising target for anti-diabetes/obesity drug discovery. Thus, there is intense interest in obtaining specific and potent PTPase inhibitors for biological studies and pharmacological development. However, given the highly conserved nature of the PTPase active site, it is unclear whether selectivity in PTPase inhibition can be achieved. We describe a combinatorial approach that is designed to target both the active site and a unique peripheral site in PTP1B. Compounds that can simultaneously associate with both sites are expected to exhibit enhanced affinity and specificity. We also describe a novel affinity-based high-throughput assay procedure that can be used for PTPase inhibitor screening. The combinatorial library/high-throughput screen protocols furnished a small molecule PTP1B inhibitor that is both potent (K(i) = 2.4 nm) and selective (little or no activity against a panel of phosphatases including Yersinia PTPase, SHP1, SHP2, LAR, HePTP, PTPalpha, CD45, VHR, MKP3, Cdc25A, Stp1, and PP2C). These results demonstrate that it is possible to acquire potent, yet highly selective inhibitors for individual members of the large PTPase family of enzymes.