Abstract: The microstructural evolution of a cold-rolled and intercritical annealed medium-Mn steel (Fe–0.10C–5Mn) was investigated during uniaxial tensile testing. In-situ observations under scanning electron microscopy, transmission electron microscopy, and X-ray diffraction analysis were conducted to characterize the progressive transformation-induced plasticity process and associated fracture initiation mechanisms. These findings were discussed with the local strain measurements via digital image correlation. The results indicated that Lüders band formation in the steel was limited to 1.5% strain, which was mainly due to the early-stage martensitic phase transformation of a very small amount of the less stable large-sized retained austenite (RA), which led to localized stress concentrations and strain hardening and further retardation of yielding. The small-sized RA exhibited high stability and progressively transformed into martensite and contributed to a stably extended Portevin–Le Chatelier effect. The volume fraction of RA gradually decreased from 26.8% to 8.2% prior to fracture. In the late deformation stage, fracture initiation primarily occurred at the austenite/martensite and ferrite/martensite interfaces and the ferrite phase.