Phase transformation of solid solution decomposition occurring in a 96 at%Mg-4 at%Dy alloy, which was solution-treated at 540 C and subsequently aged at 250 C for various lengths of time, has been investigated by conventional transmission electron microscopy (TEM) in combination with high-angle annular detector dark-field scanning transmission electron microscopy (HAADF-STEM). The atomic-scaled observations based on both techniques provide the evidence that the first appreciable change in microstructure caused by aging is the occurrence of a short-range ordered state in Dy-segregated regions and that the short-range ordered state allows full of the nuclei of 0 phase associated with an Mg 7 Dy-type structure to occur in the domains, just as in cases of Mg-Gd and Mg-Y systems. With an increase of age-hardening effect, the 0 precipitates become larger and increasingly anisotropic in morphology, accompanying three orientation variants in coherent with the Mg-matrix. When reaching at the stage of hardness maximum (as-aged at 250 C for 100 h), the 0 precipitates, which have an orthorhombic structure with lattice parameters of a ¼ 0:659 nm, b ¼ 2:231 nm, c ¼ 0:523 nm, take the form of a thin disk-shape with a thickness of 20$100 nm and a diameter of 200$400 nm. With an advance of over-aging effect, the 0 precipitates are gradually reduced in volumes and replaced by precipitates of cubic structure.