The mechanism of mechanically activated hydrogenation-disproportionation reaction of Nd16Fe76B8 alloy was investigated. The aspects of the kinetics for the mechanically activated hydrogenation-disproportionation were studied by measuring the hydrogen absorption of the alloy during milling, and the phase and microstructure change was characterized by X-ray diffraction (XRD), transmission electron microscopy (TEM), and scanning electron microscopy (SEM), respectively. The results show that, firstly, the Nd-rich phase and Nd2Fe14B matrix phase in the Nd16Fe76B8 alloy is hydrogenated into NdH2.7 and Nd2Fe14BHy. After that, the alloy powder is activated by further milling in hydrogen, and then disproportionated into α-Fe, NdH2.7 and Fe2B phases, with a grain size of about 10 nm.