Temperature dependent studies of the interaction of the clotting enzyme thrombin with the potent natural inhibitor hirudin reveal a large negative heat capacity change of -1.7(+/- 0.2) kcal/mol per K associated with the formation of the thrombin-hirudin complex, independent of the allosteric state of the enzyme. Binding of N-terminal fragments of hirudin (hir1-49 and hir1-43) is characterized by heat capacity changes of -1.2(+/- 0.1) and -0.9(+/- 0.1) kcal/mol per K, respectively. The magnitude of these heat capacity changes is unprecedented for protease-inhibitor interactions. A thermodynamic analysis based on observed heat capacity and entropy changes predicts that binding is accompanied by substantial coupled folding transitions in both hirudin and thrombin. In the absence of a structure of free thrombin, analysis of differences in the predicted number of residues which fold upon binding hirudin and its fragments leads to the following structural model: three surface loops in thrombin (W60d, W148 and fibrinogen binding loops) are disordered in the free state and fold upon formation of the thrombin-hirudin complex. Molecular dynamics simulations, run over a time scale of 5 ps, are consistent with the hypothesis of large scale coupled folding transitions in both hirudin and thrombin upon formation of the complex. Comparison of the thermodynamics for the interaction of hirudin with the slow and fast forms of thrombin allows dissection of the coupling free energy for allosteric switching. The coupling free energy for the slow-->fast transition increases linearly, in absolute value, with temperature. The coupling enthalpy and entropy terms for hirudin were found to be delta Hoc = 12(+/- 1) kcal/mol and delta Soc = 47(+/- 4) cal/mol per K. Preferential interaction with the fast form is therefore due to the balance of two opposite forces, both quite large in magnitude. The contribution of enthalpic effects opposes the slow-->fast transition and stabilizes binding to the slow form. The contribution of entropic effects favors the slow-->fast transition and stabilizes binding to the fast form. In the physiological temperature range the entropic effects prevail and result in preferential binding of hirudin to the fast form. The region of thrombin recognizing the N-terminal domain of hirudin contains most of the residues that are energetically linked to the slow-->fast transition. This region is part of the "allosteric core" of thrombin and includes the W60d loop, shaping the specificity site S2, and the Na+ binding loop connecting the last two beta-strands of the B chain.