Chitosan oligosaccharide lactate (COL) has been modified to improve water solubility of chitosan, especially for the uses in drug delivery and biomedical applications. The present study reveals that self-assembly of COL in solution forms nanoaggregates of size 10-30 nm with a critical aggregation concentration (cac) of similar to 5 mu M. Fluorescence quenching of pyrene establishes that one COL chain may form around five independent hydrophobic microdomains during self-assembly in solution that are crucial to drug-polymer contact. Interaction of COL with a representative hydrophobic drug molecule, curcumin, implies two different kinds of binding mechanisms of curcumin with the pre- and nanoaggregated forms of COL, respectively. A strong ground state interaction between curcumin and nanoaggregated COL has been noted with an association constant of 3.91 x 10(4) L/mol at 298 K. This association has been found to be diffusion controlled, enthalpy driven, and as consequences of hydrophobic effects due to van der Waals interactions. Increase in ionic strength, such as NaCl concentration, in the medium pushes the hydrophobic chain of COL and curcumin out from the solution by marginally lowering the cac and increasing the size (similar to 30-60 nm) of the nanoaggregate; thus, it also exponentially boosts the partition of curcumin into COL nanoaggregates. However, similar increase in NaCl concentration in the medium discourages contact of curcumin with preaggregated COL, confirming an electrostatic interaction between curcumin and preaggregated form of COL. This is further supported by FT-IR spectra. On the other hand, hydrophobic bile salt surges both the cac and size of nanoaggregates (similar to 100 nm), indicating bulky and hydrophobic cholate/deoxycholate group cooperatively binds with COL and curcumin for which higher concentration of COL is needed to accommodate bulky size of cholate/deoxycholate and form large nanoaggregates. The present study also reports that water vapor permeability of COL film declines linearly with curcumin concentration under investigation due to blocking of the hydrophilic part of COL by curcumin and hydrophobic nature of curcumin.