A major challenge in the clinical use of cytotoxic chemotherapeutics is maximizing efficacy in tumors while sparing normal tissue. Irinotecan is used for colorectal cancer treatment but the extent of its use is limited by toxic side effects. Liposomal delivery systems offer tools to modify pharmacokinetic and safety profiles of cytotoxic drugs. In this study, we defined parameters that maximize the antitumor activity of a nanoliposomal formulation of irinotecan (nal-IRI). In a mouse xenograft model of human colon carcinoma, nal-IRI dosing could achieve higher intratumoral levels of the prodrug irinotecan and its active metabolite SN-38 compared with free irinotecan. For example, nal-IRI administered at doses 5-fold lower than free irinotecan achieved similar intratumoral exposure of SN-38 but with superior antitumor activity. Tumor response and pharmacokinetic modeling identified the duration for which concentrations of SN-38 persisted above a critical intratumoral threshold of 120 nmol/L as determinant for antitumor activity. We identified tumor permeability and carboxylesterase activity needed for prodrug activation as critical factors in achieving longer duration of SN-38 in tumors. Simulations varying tumor permeability and carboxylesterase activity predicted a concave increase in tumor SN-38 duration, which was confirmed experimentally in 13 tumor xenograft models. Tumors in which higher SN-38 duration was achieved displayed more robust growth inhibition compared with tumors with lower SN-38 duration, confirming the importance of this factor in drug response. Overall, our work shows how liposomal encapsulation of irinotecan can safely improve its antitumor activity in preclinical models by enhancing accumulation of its active metabolite within the tumor microenvironment.