Alkali metal ion intercalation into layered transition-metal dichalcogenide structures is a promising approach to make next generation rechargeable batteries for energy storage. It has been noted that the number of Na-ions which can be reversibly intercalated and extracted per MoS2 is limited, and the chemical and electrochemical processes/mechanisms remain largely unknown, especially for nano-sized materials. Here, sodiation of MoS2 nanosheets are studied by in-situ electron diffraction and the phase transformations in sodiation are identified with the aid of DFT calculations to reveal the reaction mechanism. Several thermodynamically stable/metastable structures are identified in the sodiation pathway of MoS2 nanosheets, previously unnoticed in bulk MoS2. The gradual reduction of Mo4+ upon Na-ion intercalation leads to a transition of the Mo-S polyhedron from a trigonal prism to an octahedron around 0.375 Na per MoS2 inserted (i.e. Na0.375MoS2). When the intercalated Na-content is larger than 1.75 per MoS2 structural unit (i.e. Na1.75MoS2), the MoS2 layered structure collapses and the intercalation reaction is replaced by an irreversible conversion reaction with the formation of Na2S and metal Mo nanoparticles. The calculated sodiation pathways reproduce the experimental sodiation voltages. The current observations provide useful insights in developing sodium-ion batteries with high cycling stability.