• Complete change of crack initiation site. • Quantitative evaluation of grain-boundary retarding effect. • Crack type affects the formation of FGA. Ultrasonic fatigue tests are performed on a magnesium alloy with and without ultrasonic peening treatment (UPT). Surface enhancement layer leads to the complete change of crack initiation sites. However, crack initiation mechanism keeps the same and results in a single-faceted morphology at crack initiation site. Microcracks initiate as Mode II crack within the original grain, but deflect to Mode I crack outside of the original cracked grain. A threshold SIF value is proposed to evaluate the retarding effect of grain boundary on microcrack propagation. Outside of the original cracked grain, Mode I crack propagation below the threshold ΔK σ-th is responsible for the formation of fine granular area (FGA, a nano-grain layer). Based on the Numerous Cyclic Pressing (NCP) model, it is proposed that crack type should be another necessary condition for the formation of FGA.