© 2014 Society of Chemical Industry. Biodegradable polymer nanocomposites have been developed in this study as materials for use in the packaging of moisture-sensitive products. Poly(lactic acid) (PLA) was the main component of the nanocomposites with poly(butylene adipate-co-terephthalate) (PBAT) as flexibility enhancer. Tetrabutyl titanate was also added as a compatibilizer to enhance the interfacial affinity between PLA and PBAT by inducing the formation of some PLA/PBAT via transesterification during the melt blending process, thereby improving the mechanical properties of the blends. Silver-loaded kaolinite synthesized via chemical reduction was also incorporated into the compatibilized blends for further property improvement. Herein, we report a novel biodegradable quaternary nanocomposite system with intercalated-exfoliated clay dispersion that was uniquely achieved by increasing the interlamellar space between kaolinite layers through silver nanoparticle insertion. The resultant nanocomposites containing as little as 4 phr modified clay reduced the elongation at break from 213.0±5.85% to 53.8±1.81%, enhanced thermal stability (initial decomposition temperature increased from 378°C to 399°C) and exhibited a water vapor permeability reduction of 41.85%. On the basis of these properties, the developed nanocomposites are considered to be promising candidates for use in bio-packaging applications to replace non-biodegradable and petro-based plastics.