The effect of deformation strain at room temperature on the microstructural and mechanical properties of Zircaloy-2 was investigated in the present work. The sample was initially heat treated at 800 °C in argon environment and quenched in mercury prior to rolling. The deformed alloys were characterized by using EBSD and TEM. It reveals the misorientation of incidental grain boundaries (IDBs) due to large plastic strain induced in the sample. The recovery of deformed alloy upon annealing leads to the formation of ultrafine and nanostructured grains in the alloy. The hardness achieved after 85% room temperature rolling (RTR) is found to be 269 HV, while the tensile strength is 679 MPa and 697 MPa in the rolling and transverse direction, respectively. The improvement in strength is due to generation of high dislocation density and ultrafine grains in the deformed alloy with 85% thickness reduction, during rolling. The deformed alloy subjected to annealing at 400 °C for 30 min sample shows increase in ductility (6% and 7.2%) in rolling and transverse direction, respectively, due to the annihilation of dislocations as evident from the TEM study.