In our study, the minimum size of the rubber phase in the EPDM/PP blend at the early stage of dynamic vulcanization was firstly calculated to be in the range of 25 nm and 46 nm by using the critical breakup law of the viscoelastic droplets in matrix. Meanwhile, the real size of rubber phase in Thermoplastic Vulcanizate (TPV) at both the early stage and the final stage of dynamic vulcanization were observed by using Peak Force Tapping Atomic Force Microscopy (PF-AFM). The results indicated that EPDM phase indeed broke up into nano-scale particles at the early stage of dynamic vulcanization, consistent well with the calculated result. More interesting, it was firstly revealed that the micro-meter sized rubber particles commonly observed in TPV were actually the agglomeration of nano-scale rubber particles with a diameter of 40-60 nm. We further revealed a new mechanism for the morphological evolution and microstructure formation of TPV during dynamic vulcanization as following. First, the breakup and crosslinking of the rubber phase mainly occured at the early stage of dynamic vulcanization. The phase inversion of the rubber phase and thermoplastic occured when all the rubber nanodroplets transformed into interconnected nanoparticles, which formed a strong rubber network. At the later stage, these rubber nanoparticles agglomerated more densely because of the requirement of thermodynamic stability, leading to the formation of larger and more regular agglomerates and significantly weakened rubber network. Our results indicated that the occurrence of phase inversion of the dynamically vulcanized blend was dominated by the formation and agglomeration of rubber nanoparticles rather than the increased viscoisty ratio of EPDM and PP as previously reported. This study provides guidance to control the microstructure of TPV to prepare high performance TPV products for a wide range of industrial applications. Keywords: thermoplastic vulcanizates; dynamic vulcanization; microstructure; mechanism