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Optical label switching (OLS) is a promising solution for rapidly growing packet based internet traffic and data switching in data center. Most proposed schemes apply orthogonal modulation, which superimpose a nonamplitude modulated label signal onto a Manchester coded or pulse position modulated (PPM) ASK payload signal. The extinction ratio (ER) has to be reduced for overlaid signal. To avoid the quality degradation of payload signal from low ER, a differential phase shift keying (DPSK) over inverse PPM is proposed in this paper. Due to the high mark ratio of the inverse PPM, the proposed DPSK over inverse PPM modulation achieves a high ER for the ASK signal while induces limited crosstalk to the DPSK signal. Compare with the previously proposed schemes, the test results show the proposed DPSK over inverse 4PPM modulation achieves an optimum ER improvement of at least 6 dB to support an extended of at least 10.5 km. [ABSTRACT FROM AUTHOR]