Due to the insufficient slip systems, Mg and its alloys exhibit poor ductility during plastic deformation at room temperature. To solve this problem, alloying is considered as a most effective method to improve the ductility of Mg alloys, which attracts wide attentions of industries. However, it is still a challenge to understand the ductilization mechanism, because of the complicated alloying elements and their interactions with Mg matrix. In this work, pure Mg and Mg-Y alloys were comparatively studied to investigate the effect of Y addition on microstructure evolution and mechanical properties. A huge increase of uniform elongation, from 5.3% to 20.7%, was achieved via only 3 wt% addition of yttrium. TEM results revealed that the only activated slip system in pure Mg was basal slip, led to its poor ductility at room temperature. In contrast, a large number of stacking faults and non-basal dislocations with component were observed in the deformed Mg-Y alloy, which was proposed as the main reason for significant improvement of strain hardening and ductility. High resolution TEM indicated that most of the stacking faults were I1 and I2 intrinsic faults, which played a critical role in improving the ductility of Mg-Y alloy. Addition of Y into Mg alloy decreased the stacking fault energy, which induced high density stacking faults in the grain interior.