Human recombinant gamma interferon (INF-gamma) activated human peripheral blood monocytes to a cytotoxic state capable of lysing adherent tumorigenic cells without harming normal cells. The efficiency of INF-gamma activation of monocytes is enhanced by encapsulating INF-gamma within liposomes: The minimum effective dose (MED) of free INF-gamma for monocyte activation was found to be 1-10 U/ml, per 10(5) monocytes, whereas the minimum dose for IFN-gamma encapsulated in liposomes was less than 0.0025 U. Monocytes treated with liposome-encapsulated INF-gamma retained their cytotoxic phenotype for much longer than do monocytes treated with free INF-gamma. Since liposomes can be passively targeted to cells of the reticuloendothelial system following IV administration, these findings suggest that liposome-encapsulated INF-gamma may have therapeutic potential that should be evaluated in vivo.