Cu-Zn alloys are one of the most commercially important metallic materials because of their excellent physical and mechanical properties, ease of fabrication and low cost. Ultrafine grained (UFG) metallic materials intrigue great interest due to their high strength, and most UFG materials are produced by severe plastic deformation (SPD). However, utilizing SPD to produce UFG materials needs large strain. Moreover, most UFG alloys produced by SPD have limited thermal stability and ductility which restrict the application in practical production. In this work, a UFG Cu-30Zn-0.15Fe alloy with good comprehensive properties and high thermal stability was prepared. Effect of minor Fe addition on the microstructure evolution of UFG Cu-Zn-Fe alloy subjected to cold rolling and subsequent isothermal annealing at 573 K was investigated through OM, TEM and SEM/EBSD observations. The results show that second phase particles are introduced into Cu-Zn-Fe alloy with trace P element by Fe addition. The second phase particles are identified as hcp structured Fe₂P phase with diameters ranging at 50~300 nm. The hardness-annealing time curves of Cu-30Zn and Cu-30Zn-0.15Fe alloys have three stages, corresponding respectively to recovery, recrystallization and recrystallized grains growth. It takes longer time for Cu-Zn-Fe alloy to get recrystallization started; after fully annealed, the hardness of Cu-Zn-Fe alloy is much higher, with 30 HV increment than that of Cu-Zn alloy. The UFG Cu-Zn-Fe alloy has highly stable average grain size of 1.3 μm during the process of annealing, which results from Fe₂P particles suppressing the growth of recrystallized grains. The Fe₂P particles retard grain boundary migration and dislocation movement, resulting in less mass fraction of Σ3 twin boundaries, lower increasing speed, higher dislocation density and local stored energy. The main strengthening mechanisms for present UFG Cu-Zn-Fe alloy are second phase strengthening, fine-grain strengthening and dislocation strengthening.