Liposomes were prepared from 1-palmitoyl-2-oleoyl-sn-glycero-3-phosphocholine (POPC), which contained the water soluble proteinase alpha-chymotrypsin. This liposome entrapped enzyme showed selectivity for externally added substrates in that only small substrates (benzoyl-l-Tyr-p-nitroanilide or acetyl-l-Phe-p-nitro-anilide)-for which the liposome bilayer was permeable-were transformed into products. Large substrates (succinyl-l-Ala-l-Ala-l-Pro-l-Phe-p-nitroanilide or casein) could not penetrate from the external aqueous phase into the liposomes, and were not hydrolyzed. This substrate selectivity is entirely based on the compartimentation and permeability properties of the liposome microreactor. Copyright 1998 John Wiley & Sons, Inc.