Liposome size is a vital parameter of many quantitative biophysical studies. Sonication, or exposure to ultrasound, is used widely to manufacture artificial liposomes, yet little is known about the mechanism by which liposomes are affected by ultrasound. Cavitation, or the oscillation of small gas bubbles in a pressure-varying field, has been shown to be responsible for many biophysical effects of ultrasound on cells. Collapse cavitation is manifested in the acoustic spectrum by an f/2 subharmonic and an increase in broadband noise. In this study, we attempted to correlate the presence of cavitation with a decrease in liposome size. Lipid suspensions surrounding a hydrophone were exposed to various intensities of ultrasound and various hydrostatic pressures before measuring their size distribution with Dynamic Light Scattering. As expected, increasing ultrasound intensity with constant pressure decreased the average liposome diameter. Presence of collapse cavitation was manifested in the acoustic spectrum at high ultrasound intensities. Increasing hydrostatic pressure was shown to inhibit the presence of collapse cavitation. Interestingly, changes in liposome size still occurred when collapse cavitation was inhibited either by lowering the ultrasound intensity or by increasing the static pressure. Collapse cavitation did not correlate with decreases in liposome size. We propose a mechanism whereby stable cavitation, another type of cavitation present in sound fields, causes fluid shearing of liposomes and reduction of liposome size. A mathematical model was developed based on the Rayleigh-Plesset Equation of bubble dynamics and principles of acoustic microstreaming to estimate the shear field magnitude around an oscillating bubble. This model predicts the ultrasound intensities and pressures needed to create shear fields sufficient to cause liposome size change and correlates well with experimental data.