Lactose crystallization during storage deteriorates reconstitution performance of milk powders, but the relationship between lactose crystallization and reconstitution is inexplicit. The objective of this study is to characterize crystalline lactose in the context of formulation and elucidate the complex relationship between lactose crystallization and powder functionality. Lactose in Skim Milk Powder (SMP), Whole Milk Powder (WMP) and Fat-Filled Milk Powder (FFMP) stored under 23 %, 53 % and 75 % Relative Humidity (RH) at 25 ℃ for four months was compared. Lactose, surface chemistry and microstructure of FFMP stored at 25 ℃ and 40 ℃ at 23 % to 75 % RH for four months were also analyzed and interpreted. At the same RH, FFMP crystallized in the same pattern as WMP. At 53 % RH, FFMP and WMP differentiated from SMP in terms of lactose morphology as well as the ratio between anhydrous α-lactose and anhydrous β-lactose. Lactose remained amorphous at 23 % RH, crystallized predominantly to α/β-lactose (1:4) at 40 to 58 % RH and to α-lactose monohydrate at 75 % RH. The crystallinity index was similar for all powders containing crystalline lactose. The estimated crystallite size increased from approx. 0.1 to 20 µm with increasing RH and temperature. When amorphous lactose crystallized into crystals below approx. 0.1 µm at 25 °C and 43 % RH, the microstructure and surface lipid were comparable to that of the reference powder. This powder reconstituted into a stable suspension system comparable to that of reference (well performing) powders. These results demonstrate that crystallite size is the key property linking lactose crystallization and reconstitution. Our finding thus indicates limiting crystallite size is important for maintaining desired product quality.