Nano-size thin films comprising poly (3-hexylthiophene) (P3HT) and a fullerene derivative [6, 6] phenyl-C61-butyric acid methyl ester (PCBM) incorporating squarylium dye III (SQ3) are reported. The materials prepared were evaluated for their optical, electrical and photo-conversion efficiency. Active layer materials comprising a blend of P3HT:SQ3:PCBM were deposited by spin-coating to produce thin films measuring 100 nm and subsequently annealed at 140°C for 10 min. The films were characterized by UV-Vis-NIR spectroscopy for their optical properties, atomic force microscopy for surface morphology and film thickness, and electrical properties. Optical measurements for blends incorporating different amounts of dye showed increased photo-absorbance with increasing dye concentration. The combined contribution of SQ3 and thermal annealing resulted in increased power conversion efficiency (η) of pristine P3HT:PCBM solar cells from 1.9 to 3.9 %. The dye in the active layer improved photo-absorption by enhanced light harvesting while thermal treatment improved the nanoscale morphology leading to better metal-film interface contact and broadening of the absorption wavelength range. Key words: Polymer solar cell (PSC), squarylium dye III (SQ3), bulk hetero-junction (BHJ), power conversion efficiency (PCE), poly (3-hexylthiophene (P3HT), [6, 6]-phenyl C60 butyric acid methyl ester (PCBM).