The interaction of the recombinant hemoglobin from Vitreoscilla sp. (VHb) with the bacterial membrane of Escherichia coli cells has been investigated by measuring the propensity of VHb to interact with monolayers formed by natural bacterial phosholipids. The measurements showed that the protein is capable of penetrating the monolayers, possibly establishing interactions with the hydrophobic acyl chains. VHb is also capable of binding reversibly phospholipids and free fatty acids in solution with a strong selectivity toward cyclopropanated acyl chain species. Lipid binding occurs within the distal heme pocket as demonstrated by a sharp UV-vis spectral change corresponding to a five-coordinate to six-coordinate transition of the heme-iron ferric derivative. Oxygen binding properties are affected by the presence of the lipid component within the active site. In particular, the oxygen affinity is decreased by more than 20-fold in the presence of cyclopropanated phospholipids. The kinetic counterpart of the decrease in oxygen affinity is manifest in a 10-fold decrease in the ligand combination kinetics. Accordingly, the CO and NO combination kinetics were also significantly affected by the presence of the bound lipid within the active site. These studies indicate that the current functional hypotheses about VHb should take into account the association of the protein within the cytoplasmic membrane as well as the presence of a phospholipid within the active site. These data suggest a possible lipid-induced regulation of oxygen affinity as the basis of VHb functioning.