The fluorescein-labeled E166C mutant of the PenPC beta-lactamase (E166Cf) represents a successful model in the construction of "switch-on" fluorescent biosensors from nonallosteric proteins (Chan P.-H. et al.; J. Am Chem. Soc., 2004, 126, 4074). This paper focuses on the study of the biosensing mechanism by which the E166Cf biosensor changes its fluorescence upon beta-lactam binding and hydrolysis. Mass spectrometric and stopped-flow fluorescence studies of E166Cf with cefuroxime, penicillin G, and 6-aminopenicillanic acid reveal that the formation of enzyme-substrate complex enhances the fluorescence of E166Cf, and the subsequent regeneration of the free enzyme restores the weak fluorescence of E166Cf. Molecular modeling studies of E166Cf with penicillin G show that the fluorescein label is likely to share a common space with the beta-lactam and thiazolidine rings of the antibiotic in the active site. This spatial clash appears to cause the fluorescein label to move from the active site to the external aqueous environment upon substrate binding and hence experience higher water exposure. Steady-state fluorescence measurements indicate that the fluorescence of E166Cf can be enhanced by 6-aminopenicillanic acid, which consists of the beta-lactam and thiazolidine rings only. Thermal denaturation experiments of the wild-type enzyme, E166C, and E166Cf reveal that the E166C mutation is likely to increase the flexibility of the Omega-loop. This "modified" structural property might compensate for the possible steric effect of the fluorescein label on substrate binding.