We have studied the effect of ion beam irradiation on the microstructure of epitaxial YBa2Cu3O7−&dgr;thin films. The ion beam induced defects are found to cluster in small (<100 A˚) disordered areas. The size and density of the disordered areas are found to increase with the ion fluence. The presence of these small disordered areas can lead to the reduction of phase coherence of the electron pair wave function. Ion beam irradiation is also found to reduce the orthorhombicity of the lattice structure. A new incommensurate superlattice phase due to ion beam induced defect ordering has also been observed.