High-resolution electron microscopy was used to examine the structure evolution of Cu-60 at% Fe powder mixture during mechanical alloying. Fracture and refinement of particles, the lamellar structure formed by cold-welding, and nanocrystals, were all observed at atomic scale. The X-ray diffraction patterns show that the Bragg peaks from the bcc phase decrease obviously in intensity after 3 h milling and entirely disappear after 5 h milling. Lattice images of the products obtained after 3 h milling reveal that there are Nishiyama-Wasserman orientation relationships between the bcc and fcc phases, i.e. (001)(alpha)parallel to(110)(gamma), [1(1) over bar0$](alpha)parallel to[<1(1)over bar>](gamma) and [110](alpha)parallel to[<(1)over bar 11>](Gamma). It is likely that for a mechanically alloyed iron-rich powder mixture, ball milling induces a reverse martensitic transformation of bcc Fe(Cu) to fee Fe(Cu) phase. The greatly extended fcc phase range is closely related to this transformation. After 5 h milling, nanocrystals with sizes about 10 nm are formed.