X-ray diffraction and TEM analysis were used to study the phase transition and microstructure variation of MmNi5-x (Co, Al, Mn)x/Mg powder mixture in the process of high energy milling. The experiment result proved that the solid state reaction took place between MmNi5-x(Co, Al, Mn)x and Mg during milling and nano-phase composite structure was formed. By accurate lattice constant measurement and estimation of the formation heat, a mechanism of solid state reaction was proposed. Further more, structure variation of the nano-phase composite obtained by milling in the annealing process was also investigated. The measurement of hydrogen absoption properties proved that the properties of nano-phase composite hydrogen storage alloy prepared by ball milling are better than the conventional MmM5 alloy.