The human cysteine peptidase cathepsin K is a key enzyme in bone homoeostasis and other physiological functions. In the present study we investigate the mechanism of cathepsin K action at physiological plasma pH and its regulation by modifiers that bind outside of the active site. We show that at physiological plasma pH the enzyme fluctuates between multiple conformations that are differently susceptible to macromolecular inhibitors and can be manipulated by varying the ionic strength of the medium. The behaviour of the enzyme in vitro can be described by the presence of two discrete conformations with distinctive kinetic properties and different susceptibility to inhibition by the substrate benzyloxycarbonyl-Phe-Arg-7-amino-4-methylcoumarin. We identify and characterize sulfated glycosaminoglycans as natural allosteric modifiers of cathepsin K that exploit the conformational flexibility of the enzyme to regulate its activity and stability against autoproteolysis. All sulfated glycosaminoglycans act as non-essential activators in assays using low-molecular-mass substrates. Chondroitin sulfate and dermatan sulfate bind at one site on the enzyme, whereas heparin binds at an additional site and has a strongly stabilizing effect that is unique among human glycosaminoglycans. All glycosaminoglycans stimulate the elastinolytic activity of cathepsin K at physiological plasma pH, but only heparin also increases the collagenolytic activity of the enzyme under these conditions. Altogether these results provide novel insight into the mechanism of cathepsin K function at the molecular level and its regulation in the extracellular space.