Cu-Co has been chosen as a model system to study phase formation during mechanical alloying in systems with components exhibiting a positive heat of mixing. Phase formation is monitored by scanning electron microscopy, x-ray diffraction, and calorimetric measurements. Although the occurrence of a single fcc Bragg pattern cannot definitely prove the alloy formation on an atomic scale, the quantitative agreement of the heat release upon decomposition of the alloy with the heat of mixing, calculated from the available thermodynamic data of the system, is regarded as clear evidence for the formation of an fcc solid solution. As a mechanism of alloy formation the dissolution of Cu and Co particles during milling is discussed. It is proposed that the formation of a homogeneous solid solution is energetically favored if the particle size is reduced below a critical value, which amounts to about 1\char21{}2 nm, depending on the composition of the alloy and the temperature. The driving force is provided by the chemical contribution of the Cu/Co interface enthalpy and by the high configurational entropy of the randomly distributed atoms in the solid solution.