The main objective of this study is to improve the surface coating characteristics and reduce the dilution rate of AZ61 magnesium alloy using the laser cladding technique. This research work employed Taguchi (L16) orthogonal experimental design to investigate the relationship between process parameters and a cladding quality index. Parameters such as Scanning Speed (SS), Laser Power (LP), Powder Feed Rate (PFR) and Gas Flow (GF) were varied to analyze their impact on wear volume, dilution rate and micro-hardness of the key response variables in the laser cladding setup. Signal-to-noise ratios were calculated for each parameter to identify their individual effects on the responses. The findings indicated that powder feed rate predominantly influenced wear volume, accounting for 88.18% of its variation, while scanning speed has the highest influence on dilution rate (73.20%), and laser power significantly affected micro-hardness (84.60%). This study utilized grey relational analysis to determine the optimum processing parameters which simultaneously reduced wear volume, minimized dilution rate and enhanced micro-hardness. In particular, inclusion of Stelcar alloy powder in the substrate significantly influenced these outcomes. The application of grey relational analysis allowed the researchers to integrate multiple optimization objectives into a strategy, resulting in a clad with superior micro-hardness and minimal wear volume and dilution rate. The optimized parameters achieved the desired goals with a high degree of accuracy, confirming the effectiveness of multi-objective optimization in enhancing coating qualities and controlling dilution rate through laser cladding.