The microscopic mechanism of “transformation toughening” is thought to be the stress reduction at a crack tip resulting from a displacive phase transformation induced by the stress field of a crack under external loading. Whether transformation toughening or “transformation embrittlement” is the result depends on many different characteristics of the displacive transformation, as well as the geometry of the stress field of the crack. Since both crack and displacive transformation dynamics are sufficiently rapid to be suitably simulated in a molecular dynamics scheme we have explored this approach with the ordered intermetallic NiAl, employing Embedded Atom Method (EAM) potentials. These potentials, in turn, have allowed the construction of a Ginzburg-Landau strain free energy functional (with all the material dependent parameters determined from molecular dynamics simulations) which may then be used to carry out Monte-Carlo simulations of the crack-transformation zone interaction on a substantially larger spatial scale. The simulations reported here show the complex microstructure involving self-accommodating martensite variants which result from the stress induced martensitic transformation near a crack tip in NiAl, and also measure the resulting reduction of stress intensity factor due to the transformation. It is concluded that current continuum mechanics models of transformation toughening need to be substantially revised if they are to adequately model the size, shape and microstructure of the transformation zone and produce accurate predictions of transformation toughening.