Manduca sexta apolipophorin-III, apoLp-III, is an exchangeable apolipoprotein of 17 kDa that contains no Trp, one Tyr, and eight Phe. The effect of pH on the kinetics of association of apoLp-III with dimyristoylphosphatidylcholine was studied. The pH dependence of the kinetics showed three distinct regions. Above pH 7, the reaction rate is slow and slightly affected by pH. A approximately 40-fold increase in the rate constant is observed when the pH is decreased from 8 to 4, and a decrease in rate is observed below pH 4. Far-UV CD spectroscopy indicated that the secondary structure of the protein is not affected when decreasing the pH from 8 to 4.5. The pH dependence of the Tyr fluorescence showed three pH regions that resemble the regions observed in the kinetics. Comparison of the far-UV CD and fluorescence studies indicated the formation of a folding intermediate between pHs 4 and 7. This intermediate was also characterized by near-UV CD and fluorescence quenching. Fluorescence quenching studies with I- and Cs+ indicated a very low exposure of the Tyr residue in both native and intermediate conformations. The pH dependence of the near-UV CD spectra indicated that the native --> intermediate transition is accompanied by a loss in the packing constrains of the Tyr residue. UV absorption spectroscopy of the Phe and Tyr residues indicated that the native --> intermediate transition is also accompanied by the hydration of the Tyr residue and approximately 4 Phe residues. This report shows, for the first time, the correlation between the increase in lipid binding activity of an exchangeable apolipoprotein and the formation of a compact but hydrated conformation near physiological conditions. These results suggest a direct correlation between the lipid binding activity and the internal hydration of the apolipoprotein. The similarity between the insect exchangeable apolipoprotein and the human counterparts, apoA-I, apoA-II, etc., and the recent demonstration of the presence of a molten globular like-state of human apoA-I near physiological conditions [Gursky, O., and Atkinson, D. (1996) Proc. Natl. Acad. Sci. U.S.A. 93, 2991-2995] suggest that this highly hydrated and compact state may play an important physiological role as the most active lipid binding state of the apolipoproteins in general.