Current approaches in use of water-insoluble photosensitizers for photodynamic therapy (PDT) of cancer often demand a nano-delivery system. Here, we report a photosensitizer-loaded biocompatible nano-delivery formulation (PPaN-20) whose size was engineered to ca. 20 nm to offer improved cell/tissue penetration and efficient generation of cytotoxic singlet oxygen. PPaN-20 was fabricated through the physical assembly of all biocompatible constituents: pyropheophorbide-a (PPa, water-insoluble photosensitizer), polycaprolactone (PCL, hydrophobic/biodegradable polymer), and Pluronic F-68 (clinically approved polymeric surfactant). Repeated microemulsification/evaporation method resulted in a fine colloidal dispersion of PPaN-20 in water, where the particulate PCL matrix containing well-dispersed PPa molecules inside was stabilized by the Pluronic corona. Compared to a control sample of large-sized nanoparticles (PPaN-200) prepared by a conventional solvent displacement method, PPaN-20 revealed optimal singlet oxygen generation and efficient cellular uptake by virtue of the suitably engineered size and constitution, leading to high in vitro phototoxicity against cancer cells. Upon administration to tumor-bearing mice by peritumoral route, PPaN-20 showed efficient tumor accumulation by the enhanced cell/tissue penetration evidenced by in vivo near-infrared fluorescence imaging. The in vivo PDT treatment with peritumorally administrated PPaN-20 showed significantly enhanced suppression of tumor growth compared to the control group, demonstrating great potential as a biocompatible photosensitizing agent for locoregional PDT treatment of cancer.