In this paper, the effects of friction stir processing (FSP) parameters on the mechanical properties and microstructures of as-cast magnesium AZ91 alloy are investigated. Grain-growth and microhardness of friction-stir-processed specimens with and without nano-sized aluminium oxide (Al2O3) particles are compared. The effects of process parameters on tunnelling cavity and other friction stir processing defects are discussed. The paper describes the proper process parameters under which a uniform distribution of nano Al2O3 composite reinforcement with good interfacial integrity and significant grain refinement can be produced. Hardness studies revealed that the incorporation of nano-sized Al2O3 particulates in magnesium matrix caused the SZ hardness to increase.