Refining ceramic microstructures to nanometric range to minimize light scattering provides an effective methodology for developing novel optical ceramic materials. In this study, we reported the fabrication and properties of a new nanocomposite optical ceramic of Lu₂O₃-MgO by using nano powders synthesized via Sol-Gel method and hot-pressing sintering technology. Influence of powder synthesis conditions and hot-pressing sintering process on the microstructure of the sample was investigated, and the theoretical transmittance of the sample was calculated and compared with the measured transmittance. The results show that the Lu₂O₃-MgO ceramic fabricated by optimizing process exhibts a homogeneous phase domain distribution, a fine-grain size of 123 nm, a high transmittance of 84.5%-86.0% over the 3-5 μm wavelength range, close to the theoretical transmittance, and enhanced hardness value of 12.2 GPa, toughness value of 2.89 MPa·m^-1/2 and bending strength value of (221±12) MPa, indicating potential application in infrared transparent window material.