The merocyanine 540 (MC540)-mediated reduction of nitroxide spin labels in a liposomal system was examined using electron spin resonance (ESR) spectroscopy. Spin label reduction was light driven, and occurred in liposomes composed of both fully-saturated (dimyristoyl) and mono-unsaturated (1-palmitoyl-2-oleoyl) phosphatidylcholine. Loss of the nitroxide ESR signal was enhanced by the physiological electron donors glutathione, cysteine, and NADPH; and was strongly inhibited by the presence of molecular oxygen. Nitroxides reduced in the presence of MC540 alone could be regenerated either by purging the sample with air or by the addition of ferricyanide, indicating that the ESR signal loss was due to reduction to the corresponding hydroxylamines. Only partial regeneration was attained for nitroxides reduced in the presence of glutathione, cysteine, or NADPH. Reduction rates for the lipophilic spin labels, 5-, 12-, and 16-doxyl stearic acid, were not influenced by the position of the nitroxide moiety along the alkyl chain, however reduction of spin labels occupying primarily the aqueous phase was much slower. These studies demonstrate that MC540 can initiate oxidation/reduction (Type I) reactions. Such Type I processes may augment the effects of singlet oxygen in MC540-mediated photodynamic therapy.