In this work, the effect of friction stir processing (FSP) on microstructure and mechanical properties of an Al-5Mg-0.2Sc-0.1Zr alloy was investigated in detail. The results showed that the as-cast alloy exhibited equiaxed grain structure with a large number of primary Al3(Sc,Zr) particles inside. FSP imposed a significant grain-refining effect on the alloy, changing the average grain size of 50.5 μm to 2.4 μm, which is attributed to the occurrence of dynamic recrystallization and generation of nanoscaled Al3(Sc,Zr) precipitates. These Al3(Sc,Zr) dispersoids intense impeded the movement of dislocation and grain boundaries and hindered the growth of recrystallized grains, resulting in a remarkable grain-refining strengthening, substructure strengthening and precipitation strengthening effect. On the other hand, the residual primary Al3(Sc,Zr) particles gave rise to a loss in ductility.