There are many electronic and magnetic properties exhibited by complex oxides. Electronic phase separation (EPS) is one of those, the presence of which can be linked to exotic behaviours, such as colossal magnetoresistance, metal–insulator transition and high-temperature superconductivity. A variety of new and unusual electronic phases at the interfaces between complex oxides, in particular between two non-magnetic insulators LaAlO3 and SrTiO3, have stimulated the oxide community. However, no EPS has been observed in this system despite a theoretical prediction. Here, we report an EPS state at the LaAlO3/SrTiO3 interface, where the interface charges are separated into regions of a quasi-two-dimensional electron gas, a ferromagnetic phase, which persists above room temperature, and a (superconductor like) diamagnetic/paramagnetic phase below 60 K. The EPS is due to the selective occupancy (in the form of 2D-nanoscopic metallic droplets) of interface sub-bands of the nearly degenerate Ti orbital in the SrTiO3. The observation of this EPS demonstrates the electronic and magnetic phenomena that can emerge at the interface between complex oxides mediated by the Ti orbital.