Lignin peroxidase (LiP) is a fungal haemoprotein similar to the lignin-synthesizing plant peroxidases, but it has a higher oxidation potential and oxidizes dimethoxylated aromatic compounds to radical cations. It catalyses the degradation of lignin models but in vitro the outcome is net lignin polymerization. LiP oxidizes veratryl alcohol to radical cations which are proposed to act by charge transfer to mediate in the oxidation of lignin. Phenolic compounds are, however, preferentially oxidized, but transiently inactivate the enzyme. Analysis of the catalytic cycle of LiP shows that in the presence of veratryl alcohol the steady-state turnover intermediate is Compound II. We propose that veratryl alcohol is oxidized by the enzyme intermediate Compound I to a radical cation which now participates in charge-transfer reactions with either veratryl alcohol or another reductant, when present. Reduction of Compound II to native state may involve a radical product of veratryl alcohol or radical product of charge transfer. Phenoxy radicals, by contrast, cannot engage in charge-transfer reactions and reaction of Compound II with H2O2 ensues to form the peroxidatically inactive intermediate, Compound III. Regulation of LiP activity by phenolic compounds suggests feedback control, since many of the products of lignin degradation are phenolic. Such control would lower the concentration of phenolics relative to oxygen and favour degradative ring-opening reactions.