Here we present a novel approach of intercritical heat treatment for microstructure tailoring, in which intercritical annealing is intro-duced between conventional quenching and tempering. This induced a heterogeneous microstructure consisting of soft intercritical ferrite and hard tempered martensite, resulting in a low yield ratio (YR) and high impact toughness in a high-strength low-alloy steel. The initial yielding and subsequent work hardening behavior of the steel during tensile deformation were modified by the presence of soft intercritical ferrite after intercritical annealing, in comparison to the steel with full martensitic microstructure. The increase in YR was related to the reduction in hard-ness difference between the soft and hard phases due to the precipitation of nano-carbides and the recovery of dislocations during tempering. The excellent low-temperature toughness was ascribed not only to the decrease in probability of microcrack initiation for the reduction of hard-ness difference between two phases, but also to the increase in resistance of microcrack propagation caused by the high density of high angle grain boundaries.