Microstructure of ultra fine grained (UFG) Mg-Gd alloy prepared by high-pressure torsion (HPT) was investigated in the present work. Lattice defects introduced by HPT were characterized at first. Subsequently thermal stability of UFG structure and its development with annealing temperature were studied and correlated with changes of hardness and ductility. Precipitation effects in the alloy with UFG structure were compared with those in a conventional coarse-grained alloy. Defect studies were performed by positron annihilation spectroscopy (PAS), which represents well established non-destructive technique with a high sensitivity to open volume lattice defects like vacancies, dislocations, misfit defects etc. PAS investigations were combined with transmission electron microscopy (TEM) and X-ray diffraction (XRD). Changes of mechanical properties were monitored by Vicker’s microhardness (HV) and deformation tensile tests. It was found that HPT deformed Mg-Gd alloy exhibits UFG structure with mean grain size of 100 nm and a dense network of dislocations distributed uniformly throughout the whole sample. Although recovery of dislocations takes place at relatively low temperatures, it is not accompanied by grain growth and the mean grain size remains around 100 nm up to 300oC. Tensile tests performed at elevated temperatures to examine ductility showed that HPT-deformed alloy exhibits a superplastic behavior at 400oC. Moreover, it was found that the precipitation sequence in HPT-deformed alloy differs from that in conventional coarse-grained material.