In the process of vacuum melting AZ31 magnesium alloy, Nb powder and Mg-Nd intermediate alloy were added, respectively. The composition of inclusion and absorptivity of Nd in magnesium alloy were measured. The microstructure was observed, the precipitating phases were identified, and the approaches of increasing the mechanical properties of magnesium alloy were dicussed. The results show that amount of inclusion was decreased under vacuum condition. The absorptivity of Nd upon adding Mg-Nd intermediate alloy was higher than that upon adding Nd powder, simultaneously, new phases NdAl2 and Mg12Nd were formed, which fined grains and improved the mechanical properties of the alloy.