An intermetallic compound of nominal composition Tb0.3Dy0.7Fe1.95 was conventionally cast in the form of cylindrical rods of 8 mm diameter and directionally solidified by zoning at three different growth rates. Compounds of the same nominal composition were also directionally solidified in the form of cylindrical rods of 20 mm diameter by modified Bridgman technique, at two different growth rates. The microstructure of the directionally solidified compounds has been investigated as a function of solidification rate and compared with that of conventionally cast compound. The observed microstructural features of these samples have been correlated with the magnetostriction measured on the corresponding samples. Further, by examining the longitudinal sections cut along its cylindrical axis, a correlation of microstructure with magnetostriction has been brought out for each directionally solidified sample as a function of distance from the initially solidified end to the other. It has been observed that a large magnetostriction (at 4.5 kOe) and a high initial slope of magnetostriction versus applied magnetic field are realized in the directionally solidified samples as compared to the conventionally cast sample. An improvement in the property has been observed among the directionally solidified samples when solidified with higher growth rates. It is surmised on the basis of the observed microstructural features in this study that a large magnetostriction is realized if formation of (Tb,Dy)Fe2 occurs by congruent solidification rather than by the peritectic reaction L+(Tb,Dy)Fe3→(Tb,Dy)Fe2.