Ester-based thermoplastic polyurethane (TPU) nano-composites were prepared by melt blending at 190 C, using 3 wt% Cloisite 10A (organically modified montmorillonite clay) as the nanoscale reinforcement [TPU(C10A)]. The nanocomposites were subsequently melt-blended with polypropylene (PP) using maleic anhydride-grafted polypropylene (MA-g-PP) as a compatibilizer [in the ratio of 70/30-TPU/PP, 70/25/5-TPU/PP/MA-g-PP, 70/25/5-TPU (C10A)/PP/MA-g-PP]. Besides giving substantial increase in modulus, tensile strength, and other properties, organoclay reinforcement functions as a surface modifier for TPU hard segment resulting in improved dispersion. The morphology and other characteristics of the nanocomposite blends were investigated in terms of X-ray diffraction, fourier transform infrared spectroscopy, differential scanning calorimetry, dynamic mechanical analysis, tensile properties, scanning electron microscopy, and atomic force microscopy. The results indicate that the ester-TPU(C10A)/PP/MA-g-PP exhibited better dispersion than other blend systems; abrasion resistance and water absorption resistance were also better for this system. POLYM. ENG. SCI., 50:1878-1886, 2010. 2010 (C) Society of Plastics Engineers