To produce magnesium alloy with ultra fine-grain size, an aluminum powder was mixed to turning chips of AZ31 alloy with various contents, and then they were mechanically alloyed for various milling times. Microstructural. changes of the mechanically alloyed powder with milling were investigated. Super-saturated solid solutions of the magnesium phase are formed in the Mg-12mol%Al, its crystalline size has a nanometer scale. The solid solutions an formed the eutectic structure together with Mg17Al12 in the 30mol%Al powder mixtures mechanically alloyed for long milling time. In the case of the Mg-40mol%Al and 61.5mol%Al powders, the formation of the intermetallic compounds yields by the mechanical alloying for shorter milling time, and these crystals become to amorphous phase after the prolonged milling time. The harness of particles in the mechanically alloyed powder increases with forming of the super saturated solid solution or the intermetallic compound and their refining. The mechanically alloyed powder was extruded at various temperatures, and then mechanical properties of the alloy were investigated. Hardness and bending strength of the extruded alloy are higher than conventional cast alloy.