The evolution of deformation from plasticity to localization to damage is investigated in ferritic-pearlitic steel through nanometer-resolution microstructure-correlated SEM-DIC (µ-DIC) strain mapping, enabled through highly accurate microstructure-to-strain alignment. We reveal the key plasticity mechanisms in ferrite and pearlite as well as their evolution into localization and damage and their relation to the microstructural arrangement. Notably, two contrasting mechanisms were identified that control whether damage initiation in pearlite occurs and, through connection of localization hotspots in ferrite grains, potentially results in macroscale fracture: (i) cracking of pearlite bridges with relatively clean lamellar structure by brittle fracture of cementite lamellae due to build-up of strain concentrations in nearby ferrite, versus (ii) large plasticity without damage in pearlite bridges with a more “open”, chaotic pearlite morphology, which enables plastic percolation paths in the interlamellar ferrite channels. Based on these insights, recommendations for damage resistant ferritic-pearlitic steels are proposed.