In this paper, effect of strain gradient on adiabatic shear instability in particle reinforced metal matrix composites is investigated by making use of the strain gradient dependent constitutive equation developed by Dai et al.[9] and the linear perturbation analysis presented by Bai [10]. The results have shown that the onset of adiabatic shear instability in metal matrix composites reinforced with small particles is more prone to occur than in the composites reinforced with large particles. This means that the strain gradient provides a strong deriving force for onset of adiabatic shear instability in metal matrix composites.