PTP1B, a validated therapeutic target for diabetes and obesity, has a critical positive role in HER2 signaling in breast tumorigenesis. Efforts to develop therapeutic inhibitors of PTP1B have been frustrated by the chemical properties of the active site. We define a new mechanism of allosteric inhibition that targets the C-terminal, noncatalytic segment of PTP1B. We present what is to our knowledge the first ensemble structure of PTP1B containing this intrinsically disordered segment, within which we identified a binding site for the small-molecule inhibitor MSI-1436. We demonstrate binding to a second site close to the catalytic domain, with cooperative effects between the two sites locking PTP1B in an inactive state. MSI-1436 antagonized HER2 signaling, inhibited tumorigenesis in xenografts and abrogated metastasis in the NDL2 mouse model of breast cancer, validating inhibition of PTP1B as a therapeutic strategy in breast cancer. This new approach to inhibition of PTP1B emphasizes the potential of disordered segments of proteins as specific binding sites for therapeutic small molecules.