Mg2+-dependent, Li+-sensitive phosphatases are a widely distributed family of enzymes with significant importance throughout the biological kingdom. Inositol monophosphatase (IMPase) is an important target of Li+-based therapeutic agents in manic depressive disorders. However, despite decades of intense research efforts, the precise mechanism of Li+-induced inhibition of IMPase remains obscured. Here we describe a structural investigation of the Li+ binding site in staphylococcal IMPase I (SaIMPase I) using X-ray crystallography. The biochemical study indicated common or overlapping binding sites for Mg2+ and Li+ in the active site of SaIMPase I. The crystal structure of the SaIMPase I ternary product complex shows the presence of a phosphate and three Mg2+ ions (namely Mg1, Mg2 and Mg3) in the active site. As Li+ is virtually invisible in X-ray crystallography, competitive displacement of Mg2+ ions from the SaIMPase I ternary product complex as a function of increasing LiCl concentration was used to identify the Li+ binding site. In this approach, the disappearing electron density of Mg2+ ions due to Li+ ion binding was traced, and the Mg2+ ion present at the Mg2 binding site was found to be replaced. Moreover, based on a detailed comparative investigation of the phosphate orientation and coordination states of Mg2+ binding sites in enzyme-substrate and enzyme-product complexes, inhibition mechanisms for Li+ and Mg2+ are proposed.