The effects of Gd and Nd addition on microstructures and tensile properties of as-cast and extruded AZ80 magnesium alloy was investigated using OM, SEM, EPMA and mechanical property tests. The results show that the appropriate rare earth elements can improve the microstructures of as-cast AZ80 magnesium alloy with dendrite disappearing and more Mg17Al12 lamellar phase appearing along the grain boundaries. Grain size is reduced after homogenization. Dynamic recrystallization (DRX) occurs after extrusion and dynamically precipitated β phase distributes along the recrystallized grain boundaries in all the alloys. When adding 2% RE (Gd, Nd), the precipitated β phase hinders the grain growth and particle stimulated nucleation plays a common role in fine-grain strengthening. The highly rigid Al2Gd and Al2Nd phase can effectively impede dislocation movement and thus improve the yield strength. With the increase of RE (Gd, Nd) content, β phase precipitation decreases, RE phase particles become larger which weakens the effect of dynamic recrystallization and leads to stress concentration and strength decrease. The maximum tensile strength and best comprehensive performance can be achieved by adding 2% RE(Gd, Nd).