Deformation mechanisms were investigated in fine-grain (d=7mum) AZ31 Mg alloy in order to understand their excellent room-temperature ductility. Dislocation cross slip from basal to non-basal planes was found to occur easily at room temperature at a plastic anisotropy factor of only 1.5 instead of several tens to 100 expected from the single crystal CRSS data. Enhanced grain-boundary sliding (GBS) was also found to occur at room temperature. The contribution of GBS strain was found to be approximately 8% of total strain. The enhanced activity of non-basal dislocation slip and GBS was attributed to grain-boundary compatibility effects. Moreover, dynamic recovery was found to occur during deformation at room temperature associated with the formation of recovery twins and small-angle grain boundaries. The occurrence of these deformation mechanisms at room temperature was considered to be a major reason for an excellent ductility in fine-grain Mg alloys.