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Using molecular-dynamics simulation, we study the austenitic and martensitic phase transformation in Fe–C nanowires with C contents up to 1.2 at%. The transformation temperatures decrease with C content. The martensite temperature decreases with wire diameter towards the bulk value. During the transformation, the bcc and fcc phases obey the Kurdjumov–Sachs orientation relationship. For ultrathin wires (diameter D⩽ 2.8 nm), we observe wire buckling as well as shape-memory effects. Under axial tensile stress the martensite transformation is partially suppressed, leading to strong plastic deformation. Under the highest loads, the austenite only partially back-transforms while the crystalline phases in the wire re-orient giving the multi-phase mixture a high tensile strength.