Melt compounding of polylactide with ductile polymers is widely proposed as an efficient alternative to overcome its inherent brittleness. An ethylene alkyl acrylate is used as toughening modifier of polylactide. A two-phase morphology is detected by melt blending of Polylactide and Biomax Strong. Furthermore, the effect of the addition of organically modified nanoparticles, Cloisite 15A, on phase morphology is investigated. A transesterification reaction occurs between the matrix and the toughening modifier, leading to the formation of a terpolymer at the interface in the polymer blends, influencing the interfacial properties. This transesterification reaction is effectively catalyzed by the incorporation of the nanoparticles. The in situ formed terpolymer reveals a distinct glass transition, as the polylactide blocks along the terpolymer chain architecture restricted the segmental mobility of the ethylene alkyl acrylate blocks. The development of the terpolymer suppressed the decrease of the complex viscosity within the timeframe of the dynamic measurements. Multiple crazing is the major energy dissipation mechanism in the deformation of hybrids. The formation of an interconnected morphology in the hybrids triggers a remarkable toughening of polylactide, through the enhanced contribution of matrix plastic deformation. (C) 2016 Society of Plastics Engineers.