PET-clay nanocomposites were prepared using alkyl quaternary ammonium and phosphonium modified clays by melt-mixing at 280 degrees C using a micro twin screw extruder. The latter clays were prepared by synthesizing phosphonium surfactants using a simple one-step method followed by a cation exchange reaction. The onset temperature of decomposition (T-onset) for phosphonium clays (>300 degrees C) was found to be significantly higher than that of ammonium clays (around 240 degrees C). The clay modified with a lower concentration (0.8 meq) of phosphonium surfactant showed a higher T-onset as compared to the clay modified with a higher concentration (1.5 meq) of surfactants. Nanocomposites prepared with octadecyltriphenyl phosphonium (C18P) modified clay showed a higher extent of polymer intercalation as compared with benzyltriphenylphosphonium (BTP) and dodecyltriphenyl-phosphonium (C12P) modified clays. The nanocomposites prepared with ammonium clays showed a significant decrease in the molecular weight of PET during processing due to thermal degradation of ammonium surfactants. This resulted in a substantial decrease in the mechanical properties. The molecular weight of PET was not considerably reduced during processing upon addition of phosphonium clay. The nanocomposites prepared using phosphonium clays showed an improvement in thermal properties as compared with ammonium clay-based nanocomposites. T-onset increased significantly in the phosphonium clay-based nanocomposites and was higher for nanocomposites which contained clay modified with lower amount of surfactant. The tensile strength decreased slightly; however, the modulus showed a significant improvement upon addition of phosphonium clays, as compared with PET. Elongation at break decreased sharply with clay. (C) 2009 Wiley Periodicals, Inc. J Appl Polym Sci 113: 1720-1732, 2009