Disrupting the interaction between glycogen phosphorylase and the glycogen targeting subunit (G(L)) of protein phosphatase 1 is emerging as a novel target for the treatment of type 2 diabetes. To elucidate the molecular basis of binding, we have determined the crystal structure of liver phosphorylase bound to a G(L)-derived peptide. The structure reveals the C terminus of G(L) binding in a hydrophobically collapsed conformation to the allosteric regulator-binding site at the phosphorylase dimer interface. G(L) mimics interactions that are otherwise employed by the activator AMP. Functional studies show that G(L) binds tighter than AMP and confirm that the C-terminal Tyr-Tyr motif is the major determinant for G(L) binding potency. Our study validates the G(L)-phosphorylase interface as a novel target for small molecule interaction.