Disperse Yellow 3 [2-(4'-acetamidophenylazo)-4-methylphenol] (DY3) (I) is an important yellow dye used in industry and is also a carcinogen. Earlier we demonstrated that lignin-degrading cultures of white-rot basidiomycete Phanerochaete chrysosporium degrade DY3 to CO2. In this report, we have examined the degradation of DY3 and its naphthol analog, 1-(4'-acetamidophenylazo)-2-naphthol (NDY3) (II) by lignin peroxidase, horseradish peroxidase, and Mn(III)-malonate complex (a manganese peroxidase mimic). Lignin and manganese peroxidases are two extracellular peroxidase produced by ligninolytic cultures of P. chrysosporium and are involved in the degradation of lignin and various other environmental pollutants by this fungus. DY3 oxidation by peroxidases yields 4-methyl-1,2-benzoquinone (III), acetanilide (IV), and a dimer of DY3 (V) as products. NDY3 oxidation yields acetanilide (IV) and 1,2-naphthoquinone (VI). In deuterium incorporation experiments with DY3, 55-67% incorporation of deuterium from dioxane-d8 into acetanilide (IV) is observed. However, when D2O is the donor, deuterium is not incorporated into acetanilide (IV). Based on these results, a mechanism for azo dye degradation is proposed. The H2O2-oxidized forms of a peroxidase oxidize the phenolic ring of DY3, or its analogs, by two electrons to produce a carbonium ion, which is located on the carbon bearing the azo linkage. Water attacks the carbonium ion, producing an unstable intermediate which breaks down to generate 1,2-naphthoquinone (VI) or 4-methyl-1,2-benzoquinone (III) and 4-acetamido-phenyldiazene. O2, H2O2-oxidized peroxidase, or a metal ion, oxidize the phenyldiazene by one electron to produce a phenyldiazene radical, which cleaves homolytically to generate 4-acetamidophenyl radical and molecular nitrogen. The 4-acetamidophenyl radical then abstracts a hydrogen radical from the surroundings to produce acetanilide (IV). DY3 degradation by whole cultures of P. chrysosporium yields acetanilide as the major product. This suggests that lignin peroxidase and manganese peroxidase are involved in the in vivo metabolism of DY3 by P. chrysosporium.