The goal of designing safer, more effective drugs has led to tremendous interest in molecular mechanisms through which ligands can precisely manipulate signaling of G-protein-coupled receptors (GPCRs), the largest class of drug targets. Decades of research have led to the widely accepted view that all agonists-ligands that trigger GPCR activation-function by causing rearrangement of the GPCR's transmembrane helices, opening an intracellular pocket for binding of transducer proteins. Here we demonstrate that certain agonists instead trigger activation of free fatty acid receptor 1 by directly rearranging an intracellular loop that interacts with transducers. We validate the predictions of our atomic-level simulations by targeted mutagenesis; specific mutations which disrupt interactions with the intracellular loop convert these agonists into inverse agonists. Further analysis suggests that allosteric ligands could regulate signaling of many other GPCRs via a similar mechanism, offering rich possibilities for precise control of pharmaceutically important targets.