The initial step of the dephosphorylation reaction of a tyrosine phosphate substrate catalyzed by the low molecular weight bovine protein tyrosine phosphatase (BPTP) has been studied, making use of a combined quantum mechanical and molecular mechanical approach in molecular dynamics simulations. It was found that the enzyme favors a dianion substrate in the dephosphorylation reaction, which is consistent with experiments but in contrast to a recent mechanistic proposal involving a monoanion phosphate. The computed activation free energy is ca. 14 kcal/mol, in accord with the activation parameters determined in the present study from stopped-flow kinetics experiments. Structural analyses support the finding that BPTP catalyzes dephosphorylation reactions by stabilizing the transition state through Walden-inversion-enforced hydrogen-bonding interactions during the S(N)2 process.