A microstructure-based internal state variable (ISV) plasticity-damage model was used to model the mechanical behavior of a porous FC-0205 steel alloy that was procured via a powder metal (PM) process. Because the porosity was very high and the nearest neighbor distance (NND) for the pores was close, a new pore coalescence ISV equation was introduced that allows for enhanced pore growth from the concentrated pores. This coalescence equation effectively includes the local stress interaction within the interpore ligament distance between pores and is physically motivated with these highly porous powder metals. Monotonic tension, compression, and torsion tests were performed at various porosity levels and temperatures to obtain the set of plasticity and damage constants required for model calibration. Once the model calibration was achieved, then tension tests on two different notch radii Bridgman specimens were undertaken to study the damage-triaxiality dependence for model validation. Fracture surface analysis was performed using scanning electron microscopy (SEM) to quantify the pore sizes of the different specimens. The validated model was then used to predict the component performance of an automotive PM bearing cap. Although the microstructure-sensitive ISV model has been employed for this particular FC-0205 steel, the model is general enough to be applied to other metal alloys as well.