The invention is directed to an aqueous coating composition comprising a combination of a high molar mass urethane-modified alkyd resin A and a reactive diluent D, characterised in that the alkyd resin A has moieties derived from grafted fatty acids A1 which are graft products of fatty acids A11 having at least one olefinic unsaturation, on average, per molecule, and olefinically unsaturated linear or branched aliphatic acids A12 preferably having from three to ten carbon atoms, polyhydric aliphatic alcohols A2, fatty acids A3, polyfunctional isocyanates A4, and the reactive diluent D has a hydroxyl number of at most 5 mg/g, and comprises moieties derived from olefmically unsaturated fatty acids D1, and polyoxyalkylene glycols D2 or their monoethers, to a process of preparation thereof, and a method of use thereof for coating of wood, fibreboard, textiles, paper, cardboard, leather, and thermoplastic materials.