Phase competition in correlated oxides offers tantalizing opportunities as many intriguing physical phenomena occur near the phase transitions. Owing to a sharp metal-insulator transition (MIT) near room temperature, correlated vanadium dioxide (VO2) exhibits a strong competition between insulating and metallic phases that is important for practical applications. However, the phase boundary undergoes strong modification when strain is involved, yielding complex phase transitions. Here, we report the emergence of the nanoscale M2 phase domains in VO2 epitaxial films under anisotropic strain relaxation. The phase states of the films are imaged by multi-length-scale probes, detecting the structural and electrical properties in individual local domains. Competing evolution of the M1 and M2 phases indicates a critical role of lattice-strain on both the stability of the M2 Mott phase and the energetics of the MIT in VO2 films. This study demonstrates how strain engineering can be utilized to design phase states, which allow deliberate control of MIT behavior at the nanoscale in epitaxial VO2 films.