Abstract: ATP-sensitive potassium (KATP) channels couple the intracellular ATP concentration to insulin secretion. KATP channel activity is inhibited by ATP binding to the Kir6.2 tetramer and activated by phosphatidylinositol 4,5-bisphosphate (PIP2). Here, we use molecular dynamics simulation, electrophysiology and fluorescence spectroscopy to show that ATP and PIP2 occupy different binding pockets that share a single amino acid residue, K39. When both ligands are present, simulations suggest that K39 shows a greater preference to co-ordinate with PIP2 than with ATP. They also predict that a neonatal diabetes mutation at K39 (K39R) increases the number of hydrogen bonds formed between K39 and PIP2, potentially accounting for the reduced ATP inhibition observed in electrophysiological experiments. Our work suggests that PIP2 and ATP interact allosterically to regulate KATP channel activity. (Figure presented.). Key points: The KATP channel is activated by the binding of phosphatidylinositol 4,5-bisphosphate (PIP2) lipids and inactivated by the binding of ATP. K39 has the potential to bind to both PIP2 and ATP. A mutation to this residue (K39R) results in neonatal diabetes. This study uses patch-clamp fluorometry, electrophysiology and molecular dynamics simulation. We show that PIP2 competes with ATP for K39, and this reduces channel inhibition by ATP. We show that K39R increases channel affinity to PIP2 by increasing the number of hydrogen bonds with PIP2, when compared with the wild-type K39. This therefore decreases KATP channel inhibition by ATP.