Optically enhanced NMR with (129)Xe and (3)He is emerging as a novel and promising technique for medical imaging of lungs and other tissues. Here it is shown that hyperpolarized (129)Xe NMR provides a powerful means of measuring blood oxygenation quantitatively and noninvasively. The interaction of xenon with hemoglobin is responsible for an oxygen-dependent NMR shift of (129)Xe in red blood cells, in sharp contrast to the current model of xenon-hemoglobin binding. This effect could be exploited in brain functional studies, and in the assessment of conditions and diseases affected by blood oxygenation.