In this study, the thermal stability of gradient microstructure in the commercial AZ31B magnesium (Mg) alloy processed by laser shock peening (LSP) is systematically explored using quasi-in-situ electron backscatter diffraction (EBSD) measurement. The mechanisms of grain growth and twinning evolution of LSP-processed AZ31B Mg alloy during the annealing treatment at 300 °C are revealed. The experimental results demonstrate that there is a significant transformation of a gradient twinning microstructure into an almost twin-free microstructure, and the trend of grain growth is associated with LSP-induced strain energy storage. From the topmost surface to the sublayer of LSP-processed sample, the grain growth is mainly driven by the migrations of twin boundaries (TBs) and high-angle grain boundaries (HAGBs), respectively, which is attributed to the reduced accumulated strain energy along the LSP direction. It was demonstrated that the {101¯2} tension twins possess the capability to engulf non-corresponding parent phases, which transcends the conventional understanding that twins interact solely with their corresponding parent grains. The twins not only interact with the parent grain but also have the capacity to engulf twins of adjacent parent grains. In contrast, the isolated twins within the parent grains struggle to grow during annealing, indicating that {101¯2} tension twins have excellent thermal stability. The findings of this work can contribute to an in-depth understanding of the thermal stability and the grain growth mechanisms of LSP-induced gradient twinning microstructure in Mg alloys and provide the potential for the microstructure optimization to improve the comprehensive mechanical properties.