Transmission electron microscopy (TEM) has been employed to examine the effect of mechanical alloying and subsequent hot isostatic pressing (HIPing) on the microstructure of a mechanically alloyed niobium-yttria composite. It is shown that the mechanical alloying process severely cold-works the niobium matrix and an elongated cell structure develops. Partially recrystallized regions form during the HIP cycle. From the TEM data, it is argued that recrystallization proceeds by repeated nucleation of new strain-free grains in contact with the “old” recrystallization front. This process is facilitated by the yttria-derived dispersoids that are effective in inhibiting the motion of the “old” recrystallization front. Hence, partial recrystallization produces a necklace of small (≈0.5 to 5 μm) grains that surround the still highly deformed matrix.