Histone deacetylases (HDACs) 1, 2 & 3 form the catalytic subunit of several largetranscriptional repression complexes. Unexpectedly, the enzymatic activity of HDACs in these complexes has been shown to be regulated by inositol phosphates, which bind in a pocket sandwiched between the HDAC and corepressor proteins. However, the actual mechanism of activation remains poorly understood. Here we have elucidated the stereo chemical requirements for binding and activation by inositol phosphates, demonstrating that activation requires three adjacent phosphate groups and that other positions on the inositol ring can tolerate bulky substituents. We also demonstrate that there is allosteric communication between the inositol binding site and the active site. The crystal structure of the HDAC1:MTA1 complex bound to a novel peptide-based inhibitor and to inositol hexaphosphate suggests the molecular basis of substrate recognition, and an entropically driven allosteric mechanism of activation.