A dynamic impact test was performed on as-rolled AZ31 alloy with gradient microstructure under various strains. The microstructural evolution and mechanical properties were systematically investigated. As the strain rate gradually increases, an increasing number of twins are formed, facilitating dynamic recrystallization (DRX), and the mechanical properties are also gradually improved as well. The microstructure becomes heterogeneous at higher strain rates, but the peak stress decreases. The impact process results in significantly higher performance due to microstructural refinement, work hardening by dislocations and precipitates. In addition, both the adiabatic shear band and the adjacent crack experience a temperature rise that exceeds the recrystallization temperature of the alloy. This observation also explains the presence of ultrafine recrystallized grains within the adiabatic shear band and the appearance of molten metal around the crack.