This study aims at investigating the lime treatment effect on the changes in microstructure and water retention property of compacted saline soil, with consideration of the aggregate size effect. Two soil powders with different maximum aggregate sizes (Dmax = 0.4 and 5 mm) were prepared and stabilized by 2% lime. The microstructure, total suction and matric suction were determined at various curing times. Results showed that the lime treatment caused a rapid decrease in micro-pores and an increase in macro-pores due to the flocculation of soil particles. During curing, the percentage of micro-pores decreased and that of nano-pores increased slightly. Due to the modification of microstructure, the matric suction increased significantly at 90-day curing. However, the curing time effect on the total suction was insignificant. This was due to the fact that the Ca2+ and Mg2+ in soil pore water and the Ca2+ from hydrated lime were consumed in the precipitations of CaCO3 and Mg(OH)2, cation exchanges and pozzolanic reaction, resulting in a reduction in osmotic suction. Therefore, the increase in total suction was slight, as the increase in matric suction was balanced by the decrease in osmotic suction. The treated specimens with larger aggregates exhibited a larger modal size and thus had a smaller air entry value. The aggregate size effect on the water retention property of total suction and matric suction was found to be insignificant, which could be explained by the similar pore size distribution at micro-pore range and the same soil mineralogy for specimens with different aggregates.