Nanocomposite powders with equal volume fractions of Y2O3 and MgO have been produced by the thermal decomposition of precursor mixtures of yttrium nitrate and magnesium nitrate. Solutions of the precursor salts were mixed with ammonium acetate fuel, dried to form a gel-like substance, and then calcined to give nanocrystalline ceramic powders. The amount of ammonium acetate added to the metal nitrate precursors was varied systematically, and the morphology and distribution of the component phases in consolidated compacts of the resultant ceramic powders were examined by a combination of focused ion beam sectioning, scanning, and transmission electron microscopy. The dispersion of the Y2O3 and MgO phases within the synthesized powders improved, and the sizes of the phase domains reduced, with increasing ammonium acetate content up to the quantity required for a stoichiometric redox reaction with the metal nitrates. The addition of excess ammonium acetate gave no further improvement in phase domain dispersion or reduction in phase domain sizes. These phenomena are related to the thermal characteristics for the decomposition of the precursors and their effect on phase separation during oxide crystallization.