MR contrast agents are used to improve the detectability of pathologic conditions. In this study we clarify the mechanism of action of a newly developed superparamagnetic agent (AMI-25, Advanced Magnetics Inc., Cambridge, MA). Transverse relaxation rates were measured from segments of rat brain, heart, and liver using a CPMG pulse sequence. Relaxation rates varied with the time interval between the refocusing pulses in the sequence (tau). The diffusion effect on signal intensity was quantitated from the variation of T2 with tau. We find that diffusion in the presence of microscopic field gradients reduces T2, and that this effect differs in magnitude among tissues. Superparamagnetic iron oxide particles enhance this T2 reduction. The dependence of T2 upon tau suggests a model of restricted diffusion. Tissue image contrast induced by superparamagnetic iron oxide in spin-echo NMR studies is the result of a combination of diffusion-dependent and diffusion-independent differences in transverse relaxation.