Human dipeptidyl peptidase III (DPP III) is a zinc‐exopeptidase with implied roles in protein catabolism, pain modulation, and defense against oxidative stress. To understand the mode of ligand binding into its active site, we performed molecular modeling, site‐directed mutagenesis, and biochemical analyses. Using the recently determined crystal structure of the human DPP III we built complexes between both, the wild‐type (WT) protein and its mutant H568N with the preferred substrate Arg‐Arg‐2‐naphthylamide (RRNA) and a competitive inhibitor Tyr‐Phe‐hydroxamate (Tyr‐Phe‐NHOH). The mutation of the conserved His568, structurally equivalent to catalytically important His231 in thermolysin, to Asn, resulted in a 1300‐fold decrease of kcat for RRNA hydrolysis and in significantly lowered affinity for the inhibitor. Molecular dynamics simulations revealed the key protein–ligand interactions as well as the ligand‐induced reorganization of the binding site and its partial closure. Simultaneously, the non‐catalytic domain was observed to stretch and the opening at the wide side of the inter‐domain cleft became enhanced. The driving force for these changes was the formation of the hydrogen bond between Asp372 and the bound ligand. The structural and dynamical differences, found for the ligand binding to the WT enzyme and the H568N mutant, and the calculated binding free energies, agree well with the measured affinities. On the basis of the obtained results we suggest a possible reaction mechanism. In addition, this work provides a foundation for further site‐directed mutagenesis experiments, as well as for modeling the reaction itself. Copyright © 2010 John Wiley & Sons, Ltd.