The compatibilizing action of clay in polypropylene (PP)/natural rubber (NR) blends and its effect on mechanical properties have been investigated. PP/NR blend containing organically modified nanoclay, Cloisite 20A, was prepared by melt mixing method, using Haake rheocord-90. The blend composition was fixed at the ratio of 70/30 (PP/NR). By varying the filler loading, Cloisite 20A, mechanical properties (i.e.: tensile strength, elongation at break, Young's modulus and impact strength) showed a dramatic increase as compared to the unfilled 70/30 (PP/NR) reference blend, which is in agreement with morphological analysis carried out using transmission electron microscopy (TEM), scanning electron microscopy (SEM) and X-ray diffraction (XRD). The dispersed NR domain size was decreased linearly up to 3 μm with the addition of 5 phr of Cloisite 20A to PP/NR blend followed by a levelling off at higher concentrations of the clay addition indicating interfacial saturation. X-ray diffraction analysis and TEM images reveal an intercalated structure for all the compositions of PP/NR/clay nanocomposites. From high resolution TEM we have found that the clay predominantly localizes at the PP continuous phase and at the interface. This preferential localization of the clay has three important effects: (1) suppression of coalescence of the NR domains on account of the physical barrier exerted by the clay platelets, (2) decreased domain size of the dispersed NR phase due to the increased viscosity of the continuous PP phase on account of the localization of the clay in the PP phase (rheological reason). (3) Decrease of interfacial tension between PP an NR on account of the preferential localization of the clay at the blend interface. In fact the behaviour of the clay was analogous to the action of compatibilizers in binary polymer blends.