The harmful effect of nickel ions released from conventional stainless steel implants has provided a high level of motivation for the further development of nickel-free stainless steels. In this paper, the microstructure of medical-grade nickel-free stainless steel powders, with the chemical composition of ASTM F2581, is studied during mechanical alloying and subsequent annealing. Rietveld X-ray diffraction and transmission electron microscopy evaluations reflect nanocrystallization, austenitization and amorphization of the powders due to mechanical activation. It is also realized that annealing of the as-milled powder can develop a single austenitic structure with nanometric crystallite sizes, implying a considerable inherent resistance to grain growth. This study demonstrates the merit of mechanical alloying and subsequent annealing in the development of nanostructured medical-grade stainless steels.