Alkaline lignin of a very high molecular weight was successfully degraded into oligomers in a hot-compressed water–ethanol medium with NaOH as the catalyst and phenol as the capping agent at 220–300 °C. Under the optimal reaction conditions, i.e., 260 °C, 1 h, with the lignin/phenol ratio of 1:1 (w/w), almost complete degradation was achieved, producing <1% solid residue and negligible gas products. The obtained degraded lignin had a number-average molecular weight M n and weight-average molecular weight M w of 450 and 1000 g/mol respectively, significantly lower than the M n and M w of 10,000 and 60,000 g/mol of the original lignin. A higher temperature and a longer reaction time favoured phenol combination, but increased the formation of solid residue due to the condensation reactions of the degradation intermediates/products. The degraded lignin products were soluble in organic solvents (such as THF), and were characterized by HPLC/GPC, IR and NMR. A possible mechanism for lignin hydrolytic degradation was also proposed in this study.