We report the observation of B0 decays to the K+π-π0 final state using a data sample of 78 fb-1 collected by the Belle detector at the KEKB e+e- collider. With no assumptions about intermediate states in the decay, the branching fraction is measured to be (36.6-4.3+4.2±3.0)×10-6. We also search for B decays to intermediate two-body states with the same K+π-π0 final state. Significant B signals are observed in the ρ(770)-K+ and K*(892)+π- channels, with branching fractions of (15.1-3.3-1.5-2.1+3.4+1.4+2.0)×10-6 and (14.8-4.4-1.0-0.9+4.6+1.5+2.4) ×10-6, respectively. The first error is statistical, the second is systematic and the third is due to the largest possible interference. Contributions from other possible two-body states will be discussed. No CP asymmetry is found in the inclusive K+π-π0 or ρ-K+ modes, and we set 90% confidence level bounds on the asymmetry of -0.12