Mg-5wt%Al alloy has been synthesised from elemental Mg and Al powders using mechanical alloying. Microstructure of this alloy contains refined Mg grains (similar to140 nm) and two types of particles: cuboidal-shaped MgO phase (fcc) and plate-shaped MgAl(O) phase (hcp). The tensile yield strength of this alloy is remarkably higher than that of die-cast Mg-5wt%Al alloy and the improved strength is associated with the significant reduction in Mg grain size and a fine-scale dispersion of particles.