Liposomes containing paramagnetic chemicals have significant potential for enhancing the effectiveness and selectivity of contrast agents in magnetic resonance imaging. We have studied the interactions of water, liposomes, and contrast agents using NMR and ESR. We find that the permeability of liposomes to water is of major importance in determining the effects of these systems on water proton relaxation. Key factors include (1) liposome composition, which determines the phospholipid membrane phase behavior as a function of temperature; (2) liposome structure (unilamellar or multilamellar); (3) location of the contrast agent in the liposome (aqueous space or lipid membrane); and (4) binding of contrast agents by liposomes. By appropriate selection of these factors it is possible to obtain effective proton relaxation enhancement in a manner suitable for particular experimental or clinical needs for contrast in MRI. For maximum relaxivity using lipophilic nitroxides, the optimum system appears to be 5-doxyl stearate in multilamellar vesicles with a membrane composition that gives a phase transition temperature slightly above body temperature.