A novel cellulose insulation paper handsheet has successfully been modified with various contents of montmorillonite (MMT). Relative permittivity and breakdown strength were investigated. The microstructure of MMT in Kraft paper was observed with scanning electron microscopy (SEM) and X-ray diffraction. The relative permittivity of the immersed oil Kraft-MMT handsheets (K-MMT) initially decreased with the increasing amount of MMT. For MMT concentration of 9 wt%, K-9% MMT possessed the lowest relative permittivity of approximately 2.3 at 50 Hz. The breakdown voltage of the paper-oil-paper composite insulation system increased from 50.3 kV to 56.9 kV. The tensile strength of the paper handsheet was also measured.