Transmission electron microscopy (TEM) has been used to investigate the effect of laponite clay on microdeformation in thin latex-based polystyrene (PS) films, in which the laponite was concentrated at the original interfaces between the PS particles. At room temperature, a transition was observed from crazing in pure PS to a coarser fibrillar deformation mode as the laponite content increased. Moreover, whereas pure PS showed increasingly homogeneous deformation as T approached Tg, the fibrillar deformation zones observed in the nanocomposites persisted up to T just below Tg, and there was some evidence for yielding behaviour at even higher T in the presence of laponite. The macroscopic fracture resistance of the films, as assessed from double edge-notched tensile specimens, initially increased with laponite content, but decreased for laponite contents greater than 5 wt% with respect to the styrene monomer. This was attributed to a decrease in local ductility, consistent with the observation of reduced deformation ratios in the deformation zones by TEM, and to the intrinsic weakness of the laponite stacks and/or the PS-laponite interface. Thus, specimens with laponite contents comparable with the estimated threshold for percolation of contacts between the laponite stacks showed extremely brittle behaviour, associated with crack propagation along the interfaces between the latex particles.