In order to improve the mechanical properties of powder metallurgy (P/M) ferrite-pearlite steel, a dual phase (DP) ferrite-martensite steel was produced through intercritical annealing of sintered P/M preforms. Microstructures of the sintered and DP steels were examined with optical, scanning and transmission electron microscopes. Mechanical properties were evaluated through hardness measurements and compression tests. Microstructural studies revealed that sintered steel contained polygonal ferrite-pearlite while the DP steel contained polygonal, lath and acicular ferrite along with lath-type martensite as microstructural constituents. In DP steels, with increasing mean preform density, the microstructure contained fine and continuous network of martensite colonies with minimum porosity. The work hardening rate vs plastic strain plots (Jaoul-Crussard analysis) of both the steels revealed typical three stage deformation behaviour for low and high mean preform densities. Compression tests revealed that, DP P/M steel displayed higher strength-plasticity combination than the sintered steel. © 2012 The Chinese Society for Metals.