Aerobic decomposition and stabilization of organic matter during the composting of waste materials is primarily due to the biochemical transformation of water-soluble compounds in the liquid phase by the microbial biomass. For this reason water-soluble organic matter represents the most active fraction of compost, both biologically and chemically, and thus should directly reflect the biochemical alteration of organic matter. This work aims to elucidate the microbial-mediated processes responsible for the distribution of soluble organic matter between stable and labile pools with composting time. Accordingly, chemical analysis as well as UV absorption, and 1H and 13C-NMR spectroscopy of samples collected during the industrial composting of urban waste revealed microbial induced transformation of water-extractable organic matter over time. The chemical composition changed from labile, hydrophilic, plant-derived organic compounds in the beginning to predominately stable, hydrophobic moieties comprising lignin-derived phenols and microbially-derived carbohydrates at later stages of composting.