Selective mercuration at the 1,6-positions of 2-hydroxy derivative of Nile Red and its application towards $Hg^{2+}$-selective signaling was investigated. The 2-hydroxy Nile Red exhibited a selective UV-vis absorption and fluorescent signaling behavior towards $Hg^{2+}$ ions over common coexisting physiologically important metal ions in aqueous environment. $^1H$ NMR studies revealed that the mercuration was selectively effected at the 1,6-positions of 2-hydroxy Nile Red, which is quite different from that at the 6,8-positions for the parent Nile Red.