The ability of liposomes containing a new lipophilic muramyl peptide derivative, MDP-L-alanyl-cholesterol (MTP-CHOL), to induce peritoneal macrophage cytostatic activity and alveolar macrophage cytotoxic activity toward tumor cell targets in vitro was determined. MTP-CHOL was shown to be efficiently incorporated and subsequently retained in distearoylphosphatidylcholine/phosphatidylserine liposomes (DSPC/PS; 7:3 molar ratio), whereas hydrosoluble muramyl dipeptide (MDP) was rapidly lost due to leakage. Liposomes containing MTP-CHOL were able to stimulate mouse peritoneal macrophage cytostatic activity under conditions where free MDP was without effect. MTP-CHOL incorporated into liposomes was approximately eightfold more effective than liposomes containing entrapped MDP and 7,400-fold more effective than free MDP in inducing rat alveolar macrophage cytotoxic activity. These results provide evidence that the coupling of MDP to a lipophilic molecule, cholesterol, results in the formation of a viable liposome formulation that is a potent inducer of macrophage-mediated antitumor activity.