In this study, laser shock peening (LSP) was utilized to generate localized deformation induced martensite (DIM) in NiTi shape memory alloy. The DIM was investigated by x-ray diffraction and transmission electron microscopy. The effects of temperature and laser intensity on DIM transformation were investigated. It has been found that higher laser intensity and lower processing temperature leads to higher volume fraction of DIM. This is attributed to the increase of the chemical driving force and the increase in the density of potential martensite variant for martensite nucleation at low temperatures. The localized shape memory effect in micrometer scale after low temperature LSP has been evaluated.