The fluorescence and optical absorption of the membrane-staining dye merocyanine 540 (M-540) have been widely used to measure cellular transmembrane potentials. We have studied the molecular mechanisms of these optical changes by measuring the fluorescence polarization of M-540 and its response to membrane potential changes in hemispherical lipid bilayer membranes. The fluorescence responds to a potential step in two distinct time scales: a fast response with a rise time less than the instrumental capability of 6 micromilligram and a slow response with a time constant around 10(-1) s. Both response amplitudes are proportional to the amplitude of the membrane potential change and both require an asymmetrical distribution of M-540 across the membrane. The slow response is ascribed to a net change of the dye concentration in the membrane. The fast response appears to be dominated by a change in the distribution of orientations of the dye molecules in the membrane, with a concomitant perturbation of a monomer-dimer equilibrium, due to interaction of the applied electric field with the permanent molecular dipol moment of M-540. The amplitude of the fast fluorescence response is concentration dependent and can be modeled by including membrane saturation effects and the presence of a nonfluorescent dimer species in the membrane at high dye concentrations. Absorbance changes reported by other investigators are consistent with this model mechanism.