In this study, phase transformation kinetics was directly evaluated using a femtosecond X-ray diffraction technique for operand measurements of the dislocation densities and carbon concentrations in Fe-0.1mass%C martensitic steel. To identify the reverse transformation mechanism from α' to γ, we used an X-ray free-electron laser and ultrafast heating. A maximum heating rate of 104 °C/s, which is sufficient to avoid diffusive reversion, was achieved, and the reverse transformation during ultrafast heating was successfully observed. Our results demonstrated that a fine microstructure formed because of a phase transformation in which the dislocation density and carbon concentrations remained high owing to ultrafast heating. Fe-C martensitic steels were also found to undergo a massive reverse transformation during ultrafast heating. The formation of a fine microstructure by a simple manufacturing process, without rare elements such as Ti, Nb, or Mo, can be expected. This study will help further the development of functional steels.