Magnesium matrix composites (MgMCs) have always suffered low strengthening efficiency and poor ductility due to the difficulties in pursuing the well-bonded interface. Herein, graphene nanoplatelets (GNPs) were decorated with magnesium oxide nanoparticles (MgO NPs) through chemical co-precipitation and then incorporated into AZ91 alloy to fabricate MgMCs via powder thixoforging. The effect of MgO on the interface of the Mg/graphene system was investigated based on the first-principles calculations, and the result indicated that modifying GNPs with MgO NPs was helpful in improving the Mg-GNP interface bonding. The interface structural analysis revealed that the MgO NPs were firmly bonded with both GNPs and α-Mg through the distortion area bonding and semi-coherent interfacial bonding, severing as a bridge to fasten the interface bonding of composites. In addition, the MgO NPs on GNPs acted as a barrier to prevent GNPs from seriously reacting with the AZ91 alloy. As a result, the AZ91/MgO@GNPs composite was endowed with enhancements of 31% and 10% in the yield strength, and increments of 71% and 61% in elongation compared with the AZ91 alloy and AZ91/GNPs composite, respectively, exhibiting a more significant potential in optimizing the strength-toughness tradeoff compared with the AZ91/GNPs. Moreover, the possible strengthening and toughening mechanisms were also discussed in detail. This work offers a relatively novel surface modification strategy to modulate the Mg-GNP interface for a simultaneous improvement of strength and ductility.