1. An enzyme solely localized in the nuclear fraction of rat liver was found to convert 3-hydroxyanthranilic acid into a red product that was isolated and crystallized from the reaction mixture. The product was identified as cinnabarinic acid (2-amino-3-oxo-3H-phenoxazine-1,9-dicarboxylic acid) by comparing its properties with synthetic cinnabarinic acid. 2. The enzyme had optimum pH at 7.2. Heavy-metal ions like Ag(+), Hg(2+), MoO(4) (2-), Fe(2+) and Cu(2+) were inhibitory; Mn(2+) activated the reaction to a considerable extent. 3. The reaction was inhibited by mercaptoethanol, GSH and cysteine, and activated by p-hydroxymercuribenzoate and sodium arsenite, which may suggest the involvement of disulphide groups in the reaction.