Bruton's tyrosine kinase (Btk) is a key component of BCR signaling required for B-cell maturation and activation. Loss-of-function mutations throughout the Btk protein cause human X-linked agammaglobulinemia (XLA), a heritable genetic disorder characterized by the absence of mature B-cells and lack of adaptive immune response. In contrast, Btk signaling sustains the growth of several B-cell neoplasms, which may be treated with small-molecule tyrosine kinase inhibitors (TKIs) targeting the ATP-site of the kinase. No alternative targeted therapy is available for patients who acquire resistance to current Btk inhibitors. Whereas a number of intramolecular interactions amongst the PH, SH3, SH2, and kinase domain (KD) are well resolved and stabilize a compact autoinhibited conformation, the molecular mechanisms governing Btk activation are not fully understood. Using a combination of in silico, structural, cellular, and molecular approaches, we discovered an allosteric interface between the SH2 and the N-lobe of the KD that is critical for kinase activation in vitro and cells. In contrast to the low Btk activity of the KD alone, the presence of the SH2 domain is sufficient to increase Btk phosphorylation at Y551 and multiple other sites. This provides the structural mechanism by which a subset of XLA mutations mapped to the SH2 domain near the interface region strongly perturbs Btk activation, even though the SH2 canonical function is preserved. Furthermore, we demonstrated that the active Btk SH2-kinase adopts an elongated conformation with a dynamic contact interface structurally distinct than to the ones observed for other tyrosine kinases, such as Abl, Fes, and Csk. As allosteric interactions provide unique targeting opportunities far from the ATP-site, we developed an engineered repebody protein binding to the human Btk SH2 domain. The crystal structure of the SH2-repebody complex combined with other structural approaches demonstrated that the repebody disrupts the SH2-kinase interaction. The repebody prevented activation of wild-type and TKI-resistant Btk in vitro and cells seen by a significant decrease in Btk phosphorylation. In parallel, sole allosteric targeting inhibited Btk-dependent signaling and reduced proliferation of malignant B-cells dependent on the BCR signaling. Therefore, the SH2-kinase interface is critical for Btk activation and is the first targetable site able to trigger allosteric inhibition. As Btk targeted therapy has a great impact on several conditions, including B-cell malignancies and autoimmune diseases, this study provides a rationale to support the development of alternative Btk inhibitors. This approach for targeted inhibition could particularly benefit patients with current therapy-resistant Btk variants.