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Abstract ABCG2 is a medically important ATP-binding cassette transporter with crucial roles in the absorption and distribution of chemically-diverse toxins and drugs, reducing the cellular accumulation of chemotherapeutic drugs to facilitate multidrug resistance in cancer. ABCG2’s capacity to transport both hydrophilic and hydrophobic compounds is not well understood. Here we assess the molecular basis for substrate discrimination by the binding pocket. Substitution of a phylogenetically-conserved polar residue, N436, to alanine in the binding pocket of human ABCG2 permits only hydrophobic substrate transport, revealing the unique role of N436 as a discriminator. Molecular dynamics simulations show that this alanine substitution alters the electrostatic potential of the binding pocket favoring hydration of the transport pore. This change affects the contact with substrates and inhibitors, abrogating hydrophilic compound transport while retaining the transport of hydrophobic compounds. The N436 residue is also required for optimal transport inhibition of ABCG2, as many inhibitors are functionally impaired by this ABCG2 mutation. Overall, these findings have biomedical implications, broadly extending our understanding of substrate and inhibitor interactions.