PARP inhibitors (PARPi) have emerged as promising cancer therapeutics capable of targeting specific DNA repair pathways, but their mechanism of action with respect to PARP1-DNA retention remains unclear. Here, we developed single-molecule assays to directly monitor the retention of PARP1 on DNA lesions in real time. Our study reveals a two-step mechanism by which PARPi modulate the retention of PARP1 on DNA lesions, consisting of a primary step of catalytic inhibition via binding competition with NAD+ followed by an allosteric modulation of bound PARPi. While clinically relevant PARPi exhibit distinct allosteric modulation activities that can either increase retention of PARP1 on DNA or induce its release, their retention potencies are predominantly determined by their ability to outcompete NAD+ binding. These findings provide a mechanistic basis for improved PARPi selection according to their characteristic activities and enable further development of more potent inhibitors.