The effect of poly(ethylene glycol)--lipid (PEG--lipid) conjugates on liposomal fusion was investigated. Incorporation of PEG--lipids into large unilamellar vesicles (LUVs) composed of equimolar phosphatidylethanolamine (PE) and phosphatidylserine (PS) inhibited calcium-induced fusion. The degree of inhibition increased with increasing molar ratio of the PEG conjugate and with increasing size of the PEG moiety. Inhibition appeared to result from the steric barrier on the surface of the liposomes which opposed apposition of bilayers and interbilayer contact. In the presence of a large excess of neutral acceptor liposomes, however, fusogenic activity was restored. The rate of fusion under these conditions depended on the initial molar ratio of the PEG conjugate in the PE:PS vesicles and the length and degree of saturation of the acyl chains which composed the lipid anchor. These results are consistent with spontaneous transfer of the PEG--lipid from PE:PS LUVs to the neutral lipid sink reducing the steric barrier and allowing fusion of the PE:PS LUVs. The primary determinant of the rate of fusion was the rate of transfer of the PEG--lipid, indicating that liposomal fusion could be programmed by incorporation of appropriate PEG--lipid conjugates. Interestingly, increasing the size of the PEG group did not appear to affect the rate of fusion. The implications of these results with respect to the design of fusogenic liposomal drug delivery systems are discussed.