There has been considerable interest in protein tyrosine phosphatase 1B (PTP1B) as a therapeutic target for diabetes, obesity, as well as cancer. Identifying inhibitory compounds with good bioavailability is a major challenge of drug discovery programs targeted toward PTPs. Most current PTP active site-directed pharmacophores are negatively charged pTyr mimetics which cannot readily enter the cell. This lack of cell permeability limits the utility of such compounds in signaling studies and further therapeutic development. We identify aryl diketoacids as novel pTyr surrogates and show that neutral amide-linked aryl diketoacid dimers also exhibit excellent PTP inhibitory activity. Kinetic studies establish that these aryl diketoacid derivatives act as noncompetitive inhibitors of PTP1B. Crystal structures of ligand-bound PTP1B reveal that both the aryl diketoacid and its dimeric derivative bind PTP1B at the active site, albeit with distinct modes of interaction, in the catalytically inactive, WPD loop open conformation. Furthermore, dimeric aryl diketoacids are cell permeable and enhance insulin signaling in hepatoma cells, suggesting that targeting the inactive conformation may provide a unique opportunity for creating active site-directed PTP1B inhibitors with improved pharmacological properties.