Cytochrome P450 CYP121 is essential for the viability of Mycobacterium tuberculosis. Studies in vitro show that it can use the cyclodipeptide cyclo(l-Tyr-l-Tyr) (cYY) as a substrate. We report an investigation of the substrate and reaction specificities of CYP121 involving analysis of the interaction between CYP121 and 14 cYY analogues with various modifications of the side chains or the diketopiperazine (DKP) ring. Spectral titration experiments show that CYP121 significantly bound only cyclodipeptides with a conserved DKP ring carrying two aryl side chains in l-configuration. CYP121 did not efficiently or selectively transform any of the cYY analogues tested, indicating a high specificity for cYY. The molecular determinants of this specificity were inferred from both crystal structures of CYP121-analog complexes solved at high resolution and solution NMR spectroscopy of the analogues. Bound cYY or its analogues all displayed a similar set of contacts with CYP121 residues Asn(85), Phe(168), and Trp(182). The propensity of the cYY tyrosyl to point toward Arg(386) was dependent on the presence of the DKP ring that limits the conformational freedom of the ligand. The correct positioning of the hydroxyl of this tyrosyl was essential for conversion of cYY. Thus, the specificity of CYP121 results from both a restricted binding specificity and a fine-tuned P450 substrate relationship. These results document the catalytic mechanism of CYP121 and improve our understanding of its function in vivo. This work contributes to progress toward the design of inhibitors of this essential protein of M. tuberculosis that could be used for antituberculosis therapy.