Composites with fabric reinforcements offer excellent energy dissipation and high damage tolerance as compared to long fiber unidirectional composites. Their mechanical behavior depends on local stress fields generated due to complex fabric meso-structure. Under loading, microdamage can initiate at multiple locations in this meso-structure. Thus, the design of fabric reinforcements should be carefully considered to achieve desired mechanical properties. In this work, hybrid fabric reinforcements are designed with carbon- and stainless steel fibers to be used at composite-metal joints in structural applications to achieve a smooth property gradient from the composite-side to the metal-side in such joints. Hybrid composite test specimens are subjected to quasi-static tensile loading and their properties are compared with non-hybrid carbon- and steel fiber reference materials. Their polished edges are inspected under optical microscope to detect sites of micro-damage initiation in the hybrid meso-structure. Damage propagation and corresponding stiffness reduction is also studied with increase in applied strain levels.