Water and ethanol are completely MISCIBLE when combined. That means you mix any amount of ethanol in water (and vice versa) and it will form a SOLUTION. (Note that methanol and propanol are also completely miscible with water.) That is not the problem.
The problem is keeping the ethanol or a solution of ethanol plus water blended into the gasoline. As Spidey mentioned, there is relatively little water that a 10% ethanol gasoline blend can absorb before the ethanol-water component separates from the gasoline into an AQUEOUS LAYER (water plus things that dissolve easily into a water solution--like ethanol). When this happens, you get a layer of gasoline on top and a second layer of ethanol-water on the bottom. Guess where the fuel pickup is in most OPE? The bottom of the fuel tank. D'OH!