The effect of dynamic microstructural evolution on austenite retention was investigated in a transformation-induced plasticity-assisted multiphase steel by compressive deformation between 993 K and 1233 K (720 °C and 960 °C) covering the intercritical two-phase region. Based on optical microscopy and electron backscatter diffraction observations, extensive dynamic recovery of ferrite occurred below 1113 K (840 °C), i.e., lower part of two-phase region, due to strain concentration in the ferrite. Deformation-induced ferrite formation occurred at temperatures between 1113 K and 1153 K (840 °C to 880 °C), i.e., upper part of two-phase region, providing up to 27 pct additional fine ferrite grains compared to the undeformed state. Dynamic recrystallization of austenite took place at temperatures above 1173 K (900 °C), above Ac3. The dynamic restoration phenomena were found to have no positive influence on austenite retention; however, shear punch test results indicated that the specimens processed at 1113 K to 1153 K (840 °C to 880 °C) had a very good combination of strength and elongation, which was attributed to the synergic effects of the transformation of retained austenite and the fine ferrite structure generated through deformation-induced ferrite formation. X-ray diffraction analysis and scanning electron microscopy showed that deformation-induced ferrite might have rejected the excess carbon to the boundaries, thereby promoting the austenite formation in these regions. The present findings suggest that austenite can be dynamically stabilized as the result of deformation-induced ferrite formation. The effect is referred to as dynamic transformation-assisted austenite retention.