In order to investigate the mechanism of chip formation and the influences of some cutting parameters, a SPH method was used to study the ultra-precision cutting AISI-4340 steel with diamond tool. The simulation results show that the chip formation mechanism in ultra-precision cutting process is the adiabatic shear band formation as the same to general cutting under the condition of the bigger cutting thicknesses （0.9μm and 0.6μm）, the chip morphology is like a saw-tooth, and the cutting force is characterized by oscillatory profiles. With the decreases of the cutting thickness up to 0.30μm and 0.15μm, respectively, the shear localized chip formation mechanism is transformed to the extruded-like chip formation behavior, the chip morphology is like a strap, and cutting force maintains approximately a constant value.