Water-in-water (W/W) or aqueous two-phase system (ATPS) emulsions are finding increasing applications in diverse fields of technology, for instance as protocells [1], and reactors for the synthesis of hydrogel particles [2], and enzyme-laden microgels [3]. Successful ATPS emulsification depends on thermodynamic incompatibility between two (bio)polymers, causing segregative phase separation [4]. Herein, we demonstrate that hydrophobization of whey proteins, by grafting acetyl moieties and heat denaturation, makes the proteins immiscible with a co-charged polysaccharide solution (alginate). Addition of erythritol, which is a low-calorie and zero-glycemic sugar alcohol, to the hydrophobized protein solution, enhanced emulsification and increased the stability of the resulting emulsion. Subsequently, the acid-induced gel properties of the emulsion was studied by dynamic rheometry and confocal microscopy. Erythritol addition reduced the surface tension (at the air-water interface) of the hydrophobized protein solution, enhancing the incompatibility between protein and alginate. It also postponed the gelation time of the hydrophobized protein solution and resulted in formation of a softer gel. Confocal imaging of the emulsion gel confirmed micro-phase separation of alginate and the droplets aggregation in the protein-rich matrix.