This study investigates the nexus between the informal economy and women's livelihood improvement in developing economies like Ethiopia. Women in developing countries in general and in Ethiopian developing economy in particular face multi-dimensional challenges that include economic, political, social and cultural factors which undermine both of their agency and capability. The high incidence of poverty and family responsibility under such circumstances compels them to the informal sector where operations are far from getting policy support. The objective of this research is to investigate the role of the informal economy in improving the livelihood of women in terms of income, employment and reduction of poverty of households led by women operating in the informal sector in Dilla town.This research sought to examine the contribution of the informal sector to the livelihood improvement of women in Dilla town. The specific focus was on women informal sector operators in the street/trading areas. The study used quantitative and qualitative research methods in order to get a deeper understanding of how the informal sector is contributing to the improvement of the livelihood of women. Both qualitative and quantitative data sets were collected and analyzed. The qualitative data were analyzed by using a thematic analysis approach and the quantitative data were analyzed using descriptive and inferential statistical summaries. The findings of the study revealed that informal sector has a lot of contribution to improve livelihoods of women through employment creation, supporting incomes to the household, reducing poverty. The major reason to operate in the informal sector is to generate livelihood income and the pushing factors are unemployment, poverty and lack of source of income. The result also revealed that after they involved in the informal business, to some extent, the livelihood of women is improved. Therefore, by understanding this potential of the informal sector, the government in collaboration with the other sectors should work on it to create a better working environment.