Precipitation of fine intermetallic particles during conventional thermal aging can significantly enhance the mechanical properties of Al alloys. However, this method offers only limited strengthening in Mg alloys as thermal aging usually leads to intermetallic particles that are too coarse in size and too sparse in spacing. Dynamic precipitation during low-temperature deformation processing offers a chance to rectify this limitation. In addition, mechanical processing often drives precipitation and recrystallization concurrently, therefore, a careful analysis of their interaction and interdependent thermodynamic driving forces is needed. Herein, we investigate dynamic precipitation and recrystallization in a coarse-grained, fully solutionized Mg-9wt.%Al alloy following low-temperature Equal Channel Angular Extrusion (ECAE) using electron microscopy, theoretical calculations, and mechanical property evaluations. Through comparisons with conventionally aged samples, we find that dynamic precipitation during extrusion produces continuous, nanoscale Mg₁₇Al₁₂ particles within grain interiors with a high number density and a low aspect ratio due to strain-induced, defect-assisted nucleation. We quantitatively analyze the dislocation-accelerated nucleation rate, and the excess vacancy concentration in comparison to the reports in Al alloys. We also find a combined set of reactions that includes discontinuous precipitation and recrystallization along grain boundaries due to the extrusion process. The volume fraction of the combined-reaction region that contains submicron Mg grains and submicron intergranular Mg₁₇Al₁₂ particles grows as the number of passes increases. Using a thermodynamic analysis, we estimate the individual and combined driving forces for precipitation and recrystallization processes at grain boundaries. We identify the chemical energy of the supersaturated Mg matrix as a major driving force for the combined reactions, which indirectly promotes recrystallization and the formation of submicron Mg grains. Our results offer key insights into the evolution of microstructure during dynamic precipitation and recrystallization, and thus provide guidance for the design of improved microstructures in Mg alloys.