In this study, the applicability of intercritical annealing heat treatment, which is usually practiced to high strength low alloy ingot steels (HSLA), to low alloy powder metallurgy (PM) processed steels was investigated. With this heat treatment, it was intended to produce a dual-phase steel structure (ferrite + martensite) in PM steel. The effect of various amount of graphite addition on microstructure was also examined. For these purposes, atomized iron powder (Ancorsteel 1000) was mixed with 0.3 and 0.5 wt% graphite powder. The mixed powders were cold pressed at 700 MPa with single action and sintered at 1120 °C for 30 min under pure argon gas atmosphere. Some of the sintered specimens were directly annealed at intercritical heat treatment temperatures of 724, 735 and 760 °C and rapidly water quenched. Through these heat treatments, ferrite + martensite microstructure with coarse grain size were produced. The other sintered specimens were first austenitized at 890 °C for 12 min before intercritically annealing and then rapidly water quenched to produce fully martensitic structure. These specimens with fully martensitic microstructure were subsequently annealed at intercritical annealing temperatures of 724, 735 and 760 °C and rapidly water quenched. Ferrite + martensite microstructure with fine grain size was obtained by this route. The experimental results showed that martensite volume fraction increased with increasing intercritical annealing temperature as well as increasing graphite content. It is thought that mechanical properties of PM steels can be controlled by these heat treatments which are an alternative to traditional heat treatments of quenching + tempering applied usually to PM steels.