Blends of polyethylene terephthalate (PET) and polypropylene (PP) at compositions 20/80 and 80/20 were modified with three different styrene-ethylene/butylene-styrene (SEBS) triblock copolymers with the aim of improving the compatibility and in particular the toughness of the blends. The compatibilizers involved an unfunctionalized SEBS and two functionalized grades containing either maleic anhydride (SEBS-g-MAH) or glycidyl methacrylate (SEBS-g-GMA) grafted to the midblock. The effects of the compatibilizers were evaluated by studies on morphology and mechanical, thermal and rheological properties of the blends. The addition of 5 wt% of a SEBS copolymer was found to stabilize the blend morphology and to improve the impact strength. The effect was, however, far more pronounced with the functionalized copolymers. Particularly high toughness combined with rather high stiffness was achieved with SEBS-g-GMA for the PET-rich composition. Addition of the functionalized SEBS copolymers resulted in a finer dispersion of the minor phase and clearly improved interfacial adhesion. Shifts in the glass transition temperature of the PET phase and increase in the melt viscosity of the compatibilized blends indicated enhanced interactions between the discrete PET and PP phases induced by the functionalized compatibilizer, in particular SEBS-g-GMA.