We study the stability of two-fluid flow through a plane channel at Reynolds numbers of 100-1000 in the linear and nonlinear regimes. The two fluids have the same density but different viscosities. The fluids, when miscible, are separated from each other by a mixed layer of small but finite thickness, across which the viscosity changes from that of one fluid to that of the other. When immiscible, the interface is sharp. Our study spans a range of Schmidt numbers, viscosity ratios and locations and thicknesses of the mixed layer. A region of instability distinct from that of the Tollmien-Schlichting mode is obtained at moderate Reynolds numbers. We show that the overlap of the layer of viscosity-stratification with the critical layer of the dominant disturbance provides a mechanism for this instability. At very low values of diffusivity, the miscible flow behaves exactly like the immiscible one in terms of stability characteristics. High levels of miscibility make the flow more stable. At intermediate levels of diffusivity however, in both linear and nonlinear regimes, miscible flow can be more unstable than the corresponding immiscible flow without surface tension. This difference is greater when the thickness of the mixed layer is decreased, since the thinner the layer of viscosity stratification, the more unstable the miscible flow. In direct numerical simulations, disturbance growth occurs at much earlier times in the miscible flow, and also the miscible flow breaks spanwise symmetry more readily to go into three-dimensionality. The following observations hold for both miscible and immiscible flows without surface tension. The stability of the flow is moderately sensitive to the location of the interface between the two fluids. The response is non-monotonic, with the least stable location of the layer being mid-way between the wall and the centreline. As expected, flow at higher Reynolds numbers is more unstable. © 2016 Cambridge University Press.