Lymphoid-specific tyrosine phosphatase (LYP), a member of the protein tyrosine phosphatase (PTP) family of signaling enzymes, is associated with a broad spectrum of autoimmune diseases. Herein we describe our structure-based lead optimization efforts within a 6-hydroxy-benzofuran-5-carboxylic acid series culminating in the identification of compound 8b, a potent and selective inhibitor of LYP with a K(i) value of 110 nM and more than 9-fold selectivity over a large panel of PTPs. The structure of LYP in complex with 8b was obtained by X-ray crystallography, providing detailed information about the molecular recognition of small-molecule ligands binding LYP. Importantly, compound 8b possesses highly efficacious cellular activity in both T- and mast cells and is capable of blocking anaphylaxis in mice. Discovery of 8b establishes a starting point for the development of clinically useful LYP inhibitors for treating a wide range of autoimmune disorders.