Over the past 20 years, the most studied and debated aspect of macromolecular crowding is how it affects protein stability. Traditionally, it is explained by a delicate balance between the stabilizing entropic effect and the stabilizing or destabilizing enthalpic effect. However, this traditional crowding theory cannot explain experimental observations like (i) negative entropic effect and (ii) entropy-enthalpy compensation. Herein, we provide experimental evidence that associated water dynamics plays a crucial role in controlling protein stability in the crowded milieu for the first time. We have correlated the modulation of associated water dynamics with the overall stability and its individual components. We showed that rigid associated water would stabilize the protein through entropy but destabilize it through enthalpy. In contrast, flexible associated water destabilizes the protein through entropy but stabilizes through enthalpy. Consideration of entropic and enthalpic modulation through crowder-induced distortion of associated water successfully explains the negative entropic part and entropy-enthalpy compensation. Furthermore, we argued that the relationship between the associated water structure and protein stability should be better understood by individual entropic and enthalpic components instead of the overall stability. Although a huge effort is necessary to generalize the mechanism, this report provides a unique way of understanding the relationship between protein stability and associated water dynamics, which might be a generic phenomenon and should trigger much research in this area.