High xylanase activity and stability toward alkaline pH is strongly desired for pulping and bleaching processes. We previously enhanced thermal stability of Bacillus circulans xylanase (BCX) by inserting into a thermophilic maltodextrin-binding protein from Pyrococcus furiosus (PfMBP) (the resulting complex named as PfMBP-BCX165). In the present study, we aimed to evolve the inserted BCX domain within PfMBP-BCX165 for greater xylanase activity toward alkaline pH while maintaining enhanced thermal stability. No BCX sequence variation was required for the thermal stabilization, thus allowing us to explore the entire BCX sequence space for the evolution. Specifically, we randomized the BCX sequence within PfMBP-BCX165 and then screened the resulting libraries to identify a PfMBP-BCX165 variant, PfMBP-BCX165(T50R). The T50R mutation enhanced xylanase activity of PfMBP-BCX165 toward alkaline pH without compromising thermal stability. When compared to PfMBP-BCX165(T50R), the corresponding unfused BCX mutant, BCXT50R, exhibited similar pH dependence of xylanase activity, yet suffered from limited thermal stability. In summary, we showed that one can improve thermal stability and xylanase activity of BCX toward alkaline pH by inserting into PfMBP followed by sequence variation of the BCX domain. Our study also suggested that insertional fusion to PfMBP would be a useful stabilizing platform for evolving many proteins.