Investigation of the relationship between microstructure and microscopic deformation behavior of dual phase steel is very important for high property dual phase steel development. In this work, step quenching (SQ) and intercritical annealing (IA) heat treatments were optimized to produce dual phase steels of similar martensite volume fraction, but with respectively isolated and continuous martensite distribution. The tensile and dynamic fracture properties of dual phase steels were investigated. Strain distribution of steels was measured by digital image correlation (DIC) method. Combined with observations of microcracks/microvoids, different deformation and fracture mechanisms were revealed. Compared to IA steel, SQ steel has lower strength, but longer elongation and higher fracture toughness, and the latter were attributed to larger deformation in ferrites that results in more stress relaxation of martensite during deformation. While in IA steel, the deformation in ferrites is blocked by adjacent martensites, so that a relatively small strain of ferrite cannot effectively relax the stress in martensites, which resulted in higher plastic deformation in martensite than in SQ steel; therefore, cracks preferentially initiate in martensite, and IA steel exhibits higher strength and lower plasticity.