Peroxidases secreted by the white-rot basidiomycete Phanerochaete chrysosporium can oxidise a wide range of recalcitrant compounds including lignin and aromatic xenobiotics. Since low-rank coals such as brown coal and lignite retain structural features of the parent lignin, we investigated the possibility that P. chrysosporium is capable of acting on a brown coal, with the production of useful low-molecular-mass compounds. In nitrogen-limiting liquid medium containing 0.03% solubilised Morwell brown coal, P. chrysosporium was found to convert about 85% of the coal after 16 days incubation to a form not recoverable by alkali-washing and acid-precipitation. The modal molecular mass of the residual coal macromolecules was reduced from the initial 65kDa to 32 kDa. Extensive bleaching of the coal coincided with the presence of extracellular lignin peroxidase (LiP) and manganese-dependent peroxidase (MnP), although both LiP and MnP activity were lower in cultures containing coal. These reductions are accounted for by interference with the enzyme assays by solubilised coal and by binding of MnP to precipitated coal. LiP was about eight times more sensitive than MnP to inhibition by solubilised coal. In nitrogen-sufficient medium containing solubilised coal, neither coal modification nor LiP activity were observed, suggesting that LiP is an essential component of the bleaching process.