The application of biodegradable magnesium-based materials in the biomedical field is highly restricted by their low fatigue strength and high corrosion rate in biological environments. Considering the sensitivity of both fatigue strength and corrosion rate to the surface characteristics of the material, apposite surface treatments could address these challenges. As a low cost and versatile severe plastic deformation technique aimed at inducing surface grain refinement, severe shot peening has been effective in enhancing mechanical properties and promoting cellular interactions on non-degradable biocompatible metallic materials. Herein, we treated the surface of a biocompatible magnesium alloy AZ31 by severe shot peening in order to evaluate the potential of surface grain refinement to enhance its functionality in a biological environment. The AZ31 samples were studied in terms of a wide variety of micro/nanostructural, mechanical, and chemical characteristics in addition to cytocompatibility properties. The evolution of surface grain structure and surface morphology were investigated using optical as well as scanning and transmission electron microscopy. Surface roughness, wettability and chemical composition, as well as in depth-microhardness and residual stress distribution, and corrosion resistance were investigated. Successive light surface grinding was used after severe shot peening to eliminate the effect of surface roughness and separately investigate the influence of grain refinement alone. Cytocompatibility tests with osteoblasts (or bone forming cells) were performed using sample extracts. Results revealed for the first time that severe shot peening can significantly enhance mechanical properties without causing adverse effects to the growth of surrounding osteoblasts. The corrosion behavior, on the other hand, was not improved by severe shot peening; nevertheless, slight grinding of the rough surface layer with a high density of crystallographic lattice defects, without removing the entire nanocrystallized layer, provided a good potential for improving corrosion characteristics after severe shot peening and thus, this method should be studied for a wide range of orthopedic applications in which biodegradable magnesium is used.