The effect of microstructures on the magnetic properties in the 6.5% Si-Fe alloy was studied. The alloy was subjected to two patterns of heat treatments, and the microstructures were observed by means of TEM. The alloy after an appropriate treatment has shown excellent soft magnetic properties, with the maximum permeability of 7.25×104 and the core loss W10/50 of 0.39 W/kg. The corresponding microstructure was characterized by the extremely fine domains of DO3 order phase existing in B2 order phase. However, the coarsening of the DO3 domains was found to reduce the maximum permeability and increase the core loss of the alloy. It is suggested that the coarsening of the DO3 domains be accompanied with the formation of magnetic contrast around the boundary of the DO3 and B2 phases. Therefore, it is assumed that the phase boundary tends to oppose the displacement of magnetic domain walls due to the existence of the magnetic contrast.