The invention relates to a method for directly producing rare earth magnesium alloy by adopting rare earth oxide. The method comprises the following steps of: adding 5-35wt% nanometer-level rare earth oxide powder in an original refining agent, adding the refining agent added with the rare earth oxide on the surface of magnesium alloy in the smelting process, sufficiently stirring, refining and standing for 10 minutes. At high temperature, the affinity of Mg and oxygen is higher than the affinity of Mg and the rare earth oxide, thereby the rare earth in the rare earth oxide in the molten magnesium liquid is reduced into simple substance rare-earth elements which are dispersed into the magnesium liquid, and meanwhile, MgO impurities generated in the reaction and the refining agent added in the refining process together sink to the furnace bottom, and the magnesium alloy which contains the rare earth and has high performance and low cost is prepared. Compared with the texture and performance of the rare earth magnesium alloy manufactured by adopting a Mg-rare earth intermediate alloy, the rare earth magnesium alloy which has the same rare earth content and is prepared by adopting the method of the invention has the same texture and has the performance improved by about 10 percent.