Cell-free extract of the unicellular rhodophyte, Cyanidium caldarium catalyzes enzymatic reduction of biliverdin IX alpha to phycocyanobilin, the chromophore of the light-harvesting phycobiliprotein, phycocyanin. The enzyme activity is soluble, and the required reductant is NADPH. The extract has been separated into three protein fractions, all of which are required to reconstitute biliverdin reduction. One fraction contains ferredoxin, which was identified by its absorption spectrum. This fraction could be replaced with commercial ferredoxin derived from spinach or the red alga, Porphyra umbilicalis. The second protein fraction contains ferredoxin-NADP+ reductase, which was identified by the ability to catalyze ferredoxin-dependent reduction of cytochrome c in the presence of NADPH. This fraction could be replaced with commercial spinach ferredoxin-NADP+ reductase. These two components appear to be identical to previously described components of the algal heme oxygenase system that catalyzes biliverdin IX alpha formation from protoheme in C. caldarium extracts. The third protein fraction, in the presence of the first two (or their commercial counterparts) plus NADPH, catalyzes the reduction of biliverdin IX alpha to phycocyanobilin. The results indicate that the transformation of biliverdin to phycocyanobilin catalyzed by C. caldarium extracts is a ferredoxin-linked reduction process. The results also suggest the possibility that heme oxygenation and biliverdin reduction may occur in C. caldarium on associated enzyme systems.