Cancer chemotherapy is hampered by serious toxicity to healthy tissues. Conceivably, encapsulation of cytotoxic drugs in actively-targeted, biocompatible nanocarriers could overcome this problem. Accordingly, we used sterically stabilized mixed micelles (SSMM) composed of biocompatible and biodegradable phospholipids to solubilize paclitaxel (P), a hydrophobic model cytotoxic drug, and deliver it to breast cancer in rats. To achieve active targeting, the surface of SSMM was grafted with a ligand, human vasoactive intestinal peptide (VIP) that selectively interacts with its cognate receptors overexpressed on breast cancer cells. We found that even in vitro cytotoxicity of P-SSMM-VIP was 2-fold higher that that of free paclitaxel (p<0.05). Given the unique attributes of P-SSMM and P-SSMM-VIP, most notable small hydrodynamic diameter (~15nm) and stealth properties, biodistribution of paclitaxel was significantly altered. Accumulation of paclitaxel in breast tumor was highest for P-SSMM-VIP, followed by P-SSMM and Cremophor based paclitaxel (PTX). Importantly, bone marrow accumulation of paclitaxel encapsulated in both SSMM-VIP and SSMM was significantly less than that of PTX. Administration of clinically-relevant dose of paclitaxel (5mg/kg) as P-SSMM-VIP and P-SSMM eradicated carcinogen-induced orthotopic breast cancer in rats, whereas PTX decreased tumor size by only 45%. In addition, a 5-fold lower dose (1mg/kg) of paclitaxel in actively targeted P-SSMM-VIP was associated with ~80% reduction in tumor size while the response to PTX and P-SSMM was significantly less. Hypotension was not observed when VIP was grafted onto SSMM. Based on our findings, we propose further development of effective and safe VIP-grafted phospholipid micelle nanomedicines of anti-cancer drugs for targeted treatment of solid tumors in humans.