Propagating deformation bands are observed to accommodate the initial plasticity in an as-extruded Mg-1.5Nd alloy under tension using digital-image-correlation. The propagating bands cause an uncommon plateau in the stress-strain response of the alloy prior to restoring a common decreasing work hardening with further straining. Effects of the deformation banding and underlying plateau in the flow stress on small scale yielding are investigated during low cycle fatigue (LCF) and tension of notched specimens. Alternating formation/disappearance of deformation bands in the gauge section of as-extruded LCF specimens during testing is observed to reduce life compared to annealed specimens exhibiting no instabilities. In contrast, the bands deflect the plastic zone ahead of the notch from the principal plane orthogonal to the applied loading inducing positive effect on toughness of the alloy.