A novel two-level optical labeling method for highly efficient transport of IP packets through WDM networks is proposed. By assigning both a wavelength label and a labeling DPSK or FSK format (orthogonal to the ASK format of the data payload), packets can be routed transparently through end-to-end optical paths. The design of a dual-label controlled optical router is presented, which features label swapping and multicasting. Key element for the label swapping is an optically integrated wavelength converter. The performance of combined ASK/DPSK and ASK/FSK modulation formats is analyzed and compared. In comparison with the combined ASK/DPSK modulation formats, the combined ASK/FSK modulation format is easier to implement and it tolerates a much larger laser line-width, but also requires a more careful fiber dispersion compensation in order to reduce the impact of the phase-to-intensity conversion. This work is part of the new 1ST project STOLAS-Switching Technologies for Optically Labeled Signals.