Protein phosphatase M (PPM) regulates key signaling pathways in prokaryotes and eukaryotes. Novel structures of bacterial PPM members revealed three divalent metal ions in their catalytic centers. The function of metal 3 (M3) remained unclear. To reveal its function, we created variants of tPphA from Thermosynechococcus elongatus in all metal-coordinating residues, and multiple variants were created for the M3 coordinating Asp-119 residue. The structures of variants D119A and D193A were resolved, showing loss of M3 binding but unaffected binding of M1 and M2 in the catalytic center of D119A, with the nucleophilic water molecule in the correct place. The catalytic activity of this variant was highly impaired. This and further structure-function analyses showed that M3 is required for catalysis by providing a water molecule as a proton donor during catalysis. Mutation of the homologue Asp residue in human PP2Cα also caused loss of function, suggesting a general requirement of M3 in PPM-catalyzed reactions.