In this work, the microstructural deformation and damage mechanisms of TRIP steel metal matrix composites (MMCs) reinforced with Magnesia Partially Stabilized Zirconia (Mg-PSZ) particles are investigated by employing in situ tensile testing within a scanning electron microscope chamber, complemented by digital image correlation and advanced image processing techniques. The study is carried out on samples with varied volume fractions (0%, 10%, and 20%) of zirconia particles and damage mechanisms in different samples under specified loading conditions. Through both qualitative and quantitative assessments of deformation, damage, and clustering, the investigation provides a comprehensive understanding of the distribution and damage initiation. The study findings reveal that, generally, the steel matrix exhibits high toughness, with minimal occurrences of microcracking at high strains that cause significant damage. In samples with increasing particle content, delamination at the matrix–particle interface and cracking of Mg-PSZ particles were found to be critical contributors to material failure and were quantitatively analyzed using computational analyses conducted with MATLAB. The work highlights the initiation and evolution of each damage mechanism in zirconia particle-reinforced TRIP steel MMCs to facilitate scientists and engineers in improving manufacturing and application decisions in industries such as automotive, aerospace, and heavy machinery, which demand materials with exceptional toughness and durability.Graphical