The effect of solid solution treatment at temperature of 415oC and different holding time prior aging at 168oC for 16 hours on the mechanical properties and microstructure of AZ81-4Gd magnesium alloy were analyzed by X-ray and SEM. The results demonstrated that with increasing the solid solution time the primary β-Mg17Al12 phase dissolve in the matrix eventually. While the holding time increases to 20 hrs, the primary β-Mg17Al12 phase was completely vanished, but Al2Gd phase kept unchanged with increasing the holding time. In the mean while, the volume fraction of the β-Mg17Al12 phase precipitated during aging increased at first with increasing the holding time then decreased. Moreover, subgrains and twins began to form within the α grain matrix when the solid solution time increased to 12hrs, and the subgains parallele with each other or in the shape of oval. Increasing the solid solution time to 20 hrs the microstructure change dramatically and consist of very fine recrystallized α grains. Futher increasing the holding time the recrystallized grain size increased accordingly. The mechanical properties testing results showed that when the solid solution time increased to 24 hrs the ultimate tensile strength of AZ81-4Gd magnesium alloy was 270 MPa and the elongation was 11.6% respectively.