Anelastic behavior of nanocrystalline Fe-17 wt.%Cr alloy obtained by mechanical alloying was investigated using a multifunctional internal friction apparatus. Internal friction (Q-1) and relative dynamic modulus (f2) have been measured as a function of temperature by free-decay method from room temperature to 400oC for the ball-milled Fe-17 wt.%Cr alloy The specimens with different milling time were examined by XRD to determine the solid solubility of Fe and Cr atoms and detect the lattice strain of the compacted specimen before and after annealing. TEM observation was employed to obtain further information about the morphology and microstructure, especially crystalline size, of the milled Fe and Cr mixture powders. It has been suggested that the anelastic behavior of ball-milled nanocrystalline Fe-17 wt.%Cr alloy origins from the viscoelastic sliding at the interfaces resulting from the thermally-activating process. The damping increasing of the specimen with smaller grain sizes is larger than that of the specimen with larger grain sizes with increasing temperature since the former contains more interfaces. The increase in the relative dynamic modulus is attributed to the structural reordering with the lowering of lattice micro-strain that is produced during milling when temperature is over 300oC.