Graphene nanoplatelets (GNP) is a relative new nanofiller used to tailor the morphology and properties of immiscible polymer blends. However, the self-agglomeration of GNP in the polymer matrix prevents the improvement in mechanical properties. In this work, a water-soluble polymer, poly(ethylene oxide) (PEO), was introduced to improve the dispersion of GNP in biodegradable immiscible poly(lactic acid) (PLA)/poly(butylene adipate-co-terephthalate) (PBAT) blends. PLA/PBAT based nanocomposites were prepared by melt-mixing PLA and PBAT with freeze-dried PEO/GNP masterbatch. It is found that a small amount of PEO incorporation (1 wt%) enhances the dispersion of GNP in the dispersed PBAT phase and reduces the complex viscosity of the systems significantly. Moreover, the presence of PEO enhances greatly the toughness and thermal stability of PLA/PBAT/GNP nanocomposites. The effect of the molecular weight of PEO was also addressed.