In protein tyrosine phosphatase 1B (PTP1B), the flexible WPD loop adopts a closed conformation (WPDclosed) in the active state of PTP1B, bringing the catalytic Asp181 close to the active site pocket, while WPD loop is in an open conformation (WPDopen) in the inactive state. Previous studies showed that Asp181 may be protonated at physiological pH, and ordered water molecules exist in the active site. In the current study, molecular dynamics simulations are employed at different Asp181 protonation states and initial positions of active site water molecules, and compared with the existing crystallographic data of PTP1B. In WPDclosed conformation, the active site is found to maintain its conformation only in the protonated state of Asp181 in both free and liganded states, while Asp181 is likely to be deprotonated in WPDopen conformation. When the active site water molecule network that is a part of the free WPDclosed crystal structure is disrupted, intermediate WPD loop conformations, similar to that in the PTPRR crystal structure, are sampled in the MD simulations. In liganded PTP1B, one active site water molecule is found to be important for facilitating the orientation of Cys215 and the phosphate ion, thus may play a role in the reaction. In conclusion, conformational stability of WPD loop, and possibly catalytic activity of PTP1B, is significantly affected by the protonation state of Asp181 and position of active site water molecules, showing that these aspects should be taken into consideration both in MD simulations and inhibitor design. © Proteins 2013. © 2012 Wiley Periodicals, Inc.