Rheumatoid arthritis (RA) is one of the most common systemic autoimmune diseases, with no current, clinically effective treatment. Activation of pro-inflammatory M1 macrophages is known to play a vital role in the pathogenesis of RA. Accumulating evidence suggests that phototherapy, especially photodynamic therapy (PDT), could apply as a new therapeutic method for the treatment of RA. However, due to the anoxic environment of RA synovial tissues and the oxygen consumption required for PDT process, the phototherapy efficiency was always reduced. Moreover, surviving and newly invading macrophages will be induced to polarize towards the pro-inflammatory M1-type, resulting in a relapse of the disease. To compensate for these deficits, we designed and developed novel phototherapeutic liposomal nanoparticles (CyI&Hb/FA-LPs) by incorporating heavy atom modified, cyanine dyes (CyI) as photosensitizers, and loading hemoglobin (Hb) into the inner core for relieving the hypoxic microenvironments and repolarizing M1-to-M2 macrophages. Meanwhile, folic acid was attached to the liposome surface to achieve active targeting of M1 macrophages. In vitro and in vivo studies demonstrate that near infrared light irradiation of CyI&Hb/FA-LPs reduces M1 macrophage populations and reduces the expression of hypoxia-inducible factor-1α that drives the remaining M1 macrophages to transition to the anti-inflammatory M2 phenotype. Moreover, intra-articular treatment of CyI&Hb/FA-LPs in a RA mouse model inhibited synovial cell infiltration, and alleviated inflammation and pathological features in the affected joint. This study highlights the potential of CyI-based oxygenated liposomes as a new and versatile strategy for implementing RA targeting phototherapy and M1-to-M2 repolarization. The dual mode phototherapy and O2 supplementation agent appears to function synergistically by reducing M1 macrophage populations through direct killing and induced apoptosis, as well as by inducing M2 phenotype proliferation.