In order to obtain an HCC-selective drug delivery system, a novel functional lipid, which is cleaved by the protease activity of matrix metalloproteinase-2 (MMP-2), was developed. The amino group of dioleoylphosphatidylethanolamine (DOPE) was conjugated with PEGylated MMP-2 substrate peptide (Gly-Pro-Leu-Gly-Ile-Ala-Gly-Gln), and MMP-2-cleavable PEG-Peptide-DOPE (PEG-PD) was synthesized. When PEG-PD was incorporated in galactosylated liposomes (Gal-PEG-PD-liposomes), we expected that Gal-PEG-PD-liposomes would not be taken up by normal hepatocytes due to the steric hindrance effect, but would be activated around HCC cells by secreted MMPs. In the pretreatment by hMMP2 (1, 5, and 10mug/ml), an hMMP2 concentration-dependent higher uptake of Gal-PEG-PD-liposomes was observed in HepG2 cells, suggesting PEG-PD cleavage. In the presence of an excess of galactose, the uptake of Gal-PEG-PD-liposomes with hMMP2 was significantly inhibited, suggesting asialoglycoprotein receptor-mediated uptake of Gal-PEG-PD-liposomes following the PEG-PD cleavage. Pretreatment of Gal-PEG-PD-liposomes with the conditioned medium of B16BL6, which contained secreted MMPs, enhanced the binding to HepG2 cells, as in the case of hMMP-2 treatment. Moreover, the cytotoxicity of N(4)-octadecyl-1-beta-d-arabinofuranosylcytosine (NOAC) incorporated Gal-PEG-PD-liposomes was enhanced by hMMPs (5mug/ml) and its cytotoxicity was significantly reduced by the presence of an excess of galactose in HepG2 cells. In conclusion, Gal-PEG-PD-liposomes were successfully developed for novel HCC-selective targeting.