Lignin peroxidase (LIP) is an extracellular enzyme produced by the lignin-degrading fungus Phanerochaete chrysosporium and is involved in azo dye degradation by this organism. In this study, LiP oxidation of the sulfonated azo dyes 4-(4'-sulfophenylazo)-2,6-dimethylphenol (I), Orange II 1-(4'-sulfophenylazo)-2-naphthol (II), a dimethyl analog of Orange II 1-(2',6'-dimethyl-4'-sulfophenylazo)-2-naphthol (III), and 4-(4'-sulfonamidophenylazo)-2,6-dimethylphenol (IV) was examined. Azo dye I was oxidized to 2,6-dimethyl-1,4-benzoquinone and 4-sulfophenyl hydroperoxide. Orange II (II) was oxidized to 1,2-naphthoquinone and 4-sulfophenyl hydroperoxide. The dimethyl analog of Orange II (III) was oxidized to 1,2-naphthoquinone and 2,6-dimethyl-4-sulfophenyl hydroperoxide. Azo dye IV was oxidized predominantly to 2,6-dimethyl-1,4-benzoquinone and another product, tentatively characterized as 4-sulfonamidophenyl hydroperoxide. In the 18O-labeling studies with 18O2, oxygen incorporation into the phenyl hydroperoxides from the oxidation of I and III was observed. A mechanism for azo dye degradation consistent with product identification and the 18O-labeling studies is proposed. Two successive one-electron oxidations of the phenolic ring of an azo dye by the H2O2-oxidized forms of LiP produces a carbonium ion. Then water attacks the phenolic carbon bearing the azo linkage, producing an unstable hydroxy intermediate which breaks down to yield a quinone and a sulfo- or sulfonamidophenyldiazene. The phenyldiazene is oxidized by O2 to generate the corresponding phenyldiazene radical, which eliminates N2 to yield a sulfo- or sulfonamidophenyl radical. O2 scavenges the latter to yield the corresponding hydroperoxide. This is the first report on the production and identification of a phenyl hydroperoxide in any chemical or biological system.