Abstract: Constructing heterostructures is essential for tailoring the mechanical properties of Al matrix composites (AMCs). In this work, multi-level heterostructures were achieved in AMCs by manipulating the cold welding of initial composite powders and in-situ solid-state reaction. The resulting microstructure features band-like coarse grain (CG) regions embedded within fine grain (FG) regions, demonstrating a heterogeneous lamella (HL) grain structure. Moreover, the in-situ solid-state reaction between Al, Mg and CuO gives rise to the generation of intragranular nano-sized MgO particles, which are primarily distributed in FGs. This unique microstructure activates hetero-deformation induced (HDI) strengthening by exacerbating the mechanical property mismatch between distinct domains. Notably, the FG regions necessitate high stress for activating dislocations, causing a “yield drop” in the bulk composite. It was also elucidated that CGs experience higher stress in the early stages of deformation compared to FG domains, leading to the formation of dislocation walls. The aggregation and recovery of these dislocations facilitate the transformation of CGs into primary equiaxed grains or substructures during subsequent plastic deformation, thereby contributing to the exceptional strain hardening of the composite. Furthermore, the intragranular distribution of MgO reinforcement promotes significant dislocation proliferation and achieves stress redistribution, which rationalizes the considerable ductility of the composite. This work offers insights into the achievement of multi-level heterogeneous composites with superior mechanical properties by synergistically regulating grain structure and reinforcement distribution configuration.