What happens as a receiver’s noise reduction control level is increased?

Modern digital noise reduction (NR) systems use complex Digital Signal Processing (DSP) algorithms to separate random background noise from coherent signals like human speech or CW. As you increase the noise reduction level, the DSP works harder to mathematically subtract the noise profile. If the control is set too high, the algorithm may begin removing parts of the desired signal along with the noise. This causes the received audio to sound "watery," robotic, or heavily distorted, thereby reducing overall intelligibility. Increasing noise reduction only affects the audio processing algorithms. It does not alter the radio's local oscillator or tuning circuits, so it will never cause frequency instability or shift.