Microstructure and tensile properties of a dual-phase (martensite + ferrite) Fe-2.3%Mn-0.05%C-0.03%Nb steel produced by intercritical annealing of martensitic specimens have been studied. In order to assess the effects of prior austenite grain size on microstructure and tensile properties of the dual-phase steel, the martensitic specimens with widely different prior austenite grain sizes were prepared by thermal cycling and thermomechanical processing. Coarse dual-phase structure consisting of fibrous martensite and ferrite was obtained by intercritical annealing of the specimens with coarse prior austenite grain size. A characteristic fine dual-phase structure consisting of homogeneously dispersed fine martensite particles and fine ferrite grains was obtained by the intercritical annealing of the specimens with ultra fine prior austenite grain size. The fine dual-phase structure was superior in both strength and ductility to the coarse dual-phase structure over a wide range of martensite volume fractions examined. It is concluded that better combination of strength and ductility of the dual-phase steel is achieved by intercritical annealing of the martensitic specimens with ultra fine prior austenite grain size which is obtained by the thermomechanical processing.