Poly(ethylene terephthalate) modified with a dianhydride (PET-anhydride) was melt-blended with a liquid crystalline copolyester (Vectra A) in the presence of a small amount of a liquid crystalline polyhydroxyether. The mechanical properties of a blend consisting of PET-anhydride/Vectra A/polyhydroxyether were drastically improved compared to blends without polyhydroxyether or without anhydride. Melt-spun fibers of PET-anhydride/Vectra A/polyhydroxyether in a 80/20/0.75 weight ratio displayed a much higher tensile modulus (17 GPa) and tensile strength (214 MPa) than did a 80/20 PET-anhydride/Vectra A blend (4 GPa and 60 MPa, respectively). A similar increase in modulus and strength was found for a 90/10/0.75 relative to a 90/10 blend. The tensile moduli of the blends can well be described by the Tsai-Halpin equation. A better fibril formation was observed, which was attributed to an improved viscosity ratio. Reactions between the various functional groups during melt processing were indicated by viscosity measurements. The polyhydroxyether may act as a reactive compatibilizer which improves the interfacial adhesion, chemically and/or physically. WAXD recordings of both blends showed a crystalline and highly oriented Vectra phase. The PET phase was unoriented and amorphous in a PET/Vectra blend and semicrystalline and weakly oriented in a PET/Vectra/polyhydroxyether blend. Postdrawing of the various blend fibers to lambda = 4 increased the modulus by about 40% and the tensile strength by more than 100%, mainly through orientation of the PET phase.