Among many kinds of infrared transparent ceramics, the Y2O3-MgO nanocomposite is one of the most promising candidates to meet the requirements of excellent IR transparency and strength. Since this nanocomposite has a large difference in refractive index between its two phases, minimizing the grain size is important to obtain transparency in the near-infrared region. The microstructure of a sintered body depends on the initial particles. We studied the effect of the microstructure of Y2O3-MgO nanocomposite on the optical and mechanical characteristics. Uniform and fine Y2O3-MgO nanoparticles can be synthesized via the glycine-nitrate process with optimum conditions. Grain coarsening was suppressed by using the hot-press method, through which small grains with enhanced transmittance and hardness was produced. The correlations between the optical properties and the sintering temperature were further investigated. The results indicate that optimized powder synthesis and sintering conditions are required to obtain Y2O3-MgO nanocomposites with outstanding mechanical and optical performance.