This paper reports a study on liquid‐liquid phase separation in an isothermal ternary system of segmented polyurethane/dimethylformamide/water system with and without the presence of nanoclay dispersion in the system. Isothermal ternary phase diagrams for three different grades with varying shore A hardness of thermoplastic polyurethane (TPU)/solvent/nonsolvent system were constructed based on the cloud point measurement that was carried out by the titration method. The effect of temperature on phase diagrams has also been studied. The binary interaction parameters between TPUs and water were estimated by water sorption experiments. The effect of organoclay dispersion concentration in the TPU solution on isothermal ternary phase diagrams has also been studied. This understanding of phase separation characteristics would be very helpful in correlating the final morphology developed in wet‐spun TPU as well as polyurethane/clay nanocomposite fibres. Copyright © 2010 Curtin University of Technology and John Wiley & Sons, Ltd.