The nano-sized ultra-fine full-vulcanized acrylonitrile butadiene rubber particles (UFNBRP) functionalized with carboxyl groups were used to toughen poly(butylene terephthalate) (PBT) through compatibilization of the two components via reactive extrusion in a twin-screw extruder. The impact strength of PBT was greatly improved with the nano-sized UFNBRP which may be attributed to its small particle size and the reactive compatibilization. Reactions between carboxyl groups on the surface of UFNBRP and hydroxyl end groups of PBT were proved with FT-IR spectra. In addition, UFNBRP also exhibited good nucleation effect and promoted the crystallization kinetics of PBT. Incorporation of small amounts of UFNBRP was found to be enough to improve the thermal stability. The maximum temperature of decomposition was increased by 25 A degrees C at 1 wt% UFNBRP in comparison with that of pure PBT.