Melt blending of polylactide (PLA) and a biodegradable poly(ether)urethane (PU) elastomer has been performed in an effort to toughen the polylactide without compromising its biodegradability and biocompatibility. The miscibility, phase morphology, mechanical properties, and toughening mechanism of the blend were investigated. The blend was found by dynamic mechanical analysis to be a partially miscible system with shifted glass transition temperatures. The PU elastomer was dispersed in the PLA matrix with a domain size of sub-micrometer scale. The addition of PU elastomer not only accelerated the crystallization speed, but also decreased the crystallinity of the PLA. With an increase in PU content, the blend shows decreased tensile strength and modulus; however, the elongation at break and the impact strength were significantly increased, indicating the toughening effects of the PU elastomer on the PLA. The brittle fracture of neat PLA was gradually transformed into ductile fracture by the addition of PU elastomer. It was found that the PLA matrix demonstrates large area, plastic deformation (shear yielding) in the blend upon being subjected the tensile and impact tests, which is an important energy-dissipation process and leads to a toughened, biodegradable polymer blend.