To reveal the modification mechanism of carbides particles by in-situ Y2O3, and then the improvement mechanisms for Ti42Al6Nb2.6C-xY alloys, the microstructures were observed by SEM, XRD and TEM, and the mechanical properties were examined. Results show that the flaky TiC transformed completely into Ti2AlC, and the morphology of Ti2AlC turned fine-needle shaped into short-rod shaped. The content of Ti2AlC with the aspect ratio of 1–5 increased from 24.2 to 81.4%, and the average aspect ratio decreased from 7.9 to 3.7 as Y increased from 0 to 0.08 at. %. The average lamellar colony size and lamellar spacing decreased from 24.054 to 17.500 μm and 0.531 to 0.304 μm, respectively. The growth of TiC phase was constrained by in-situ Y2O3, which alleviated agglomeration distribution of TiC and provided a fine TiC substrate for the nucleation of Ti2AlC. The interfacial interaction between in-situ Y2O3 and Ti2AlC restricted the longitudinal and transverse growth of Ti2AlC. The modified Ti2AlC and in-situ Y2O3 particles as nucleation sites for β grains were the basis for obtaining fine lamellar structure. For mechanical properties, the compressive strength increased from 1388 to 1781 MPa, the yield strength increased from 1265 to 1544 MPa, and the Vickers hardness increased from 495 to 609 HV. The refinement of lamellar colony by modified Ti2AlC and in-situ Y2O3, and the load strengthening of Ti2AlC particle contributed to the mechanical properties.