In the present study, plane strain compression was used to investigate the large plastic deformation behavior and microstructural evolution in magnesium alloy AZ31 with a view to understand the microstructural restoration mechanisms under the applied test conditions. While the stress–strain curves at all test conditions were indicative of dynamic recrystallization (DRX), the amounts of flow softening under different temperature–strain rate conditions was found to be different. The extent of recrystallization increased with increasing deformation temperature or decreasing strain rate with microstructures having higher extent of recrystallization revealing more homogeneous grain structure. DRX was found to be discontinuous in nature and a slightly different mechanism of DRX is proposed based on electron backscattered diffraction (EBSD) analysis. This consists of an inward bulging of the boundary due to the dislocation density being higher inside the larger deformed grains. Consequently, the deformation-induced dislocations outside such inward bulges help in anchoring them leading to the formation of recrystallized nuclei.