For the past decades, grain size reduction leading to diffusion creep in olivine is believed to be a very important process for strain localisation in the lithospheric mantle. However, the mechanisms of grain size reduction in this regime are still poorly understood (e.g., Platt, 2015). Here we show new experimental results that document grain size reduction and material weakening during wet olivine diffusion creep. While occurring for both, mono-phase and two-phase aggregates, grain size reduction is coeval with strain localisation and local phase mixing in olivine–pyroxene aggregates. Based on evidence of fluid inclusions and cracks filled with a fine-grained phase mixture, we conclude that grain size reduces as a result of fluid-assisted nucleation that takes place in the presence of an aqueous fluid during diffusion creep. Cavitation induced by grain boundary sliding (creep cavitation) can be inferred, and may play a critical role for olivine grain size reduction. Amongst their implications for rock rheology in general, our findings highlight a key process for strain localisation in the ductile uppermost mantle.