Powder plays an important role in the performance of tungsten composites. In this work, the nano-scaled W-Y2O3 powder was successfully synthesized by two-stage process of nano in-situ composite method: the calcination in air and hydrogen reduction. The phase transformation and microstructure evolution of powder were investigated and observed by the XRD, SEM, EDS and TEM technologies. Besides, the reaction and refining mechanisms for hydrogen reduction have initially proposed as well. Results showed that the phase transformation processes went through two stages of dehydration and deamination and finally forms complete tungsten oxide during the calcination stage. While, in the reduction stage, WO3 phase was mainly reduced to different WOX (1/3 ≤ x < 3) intermediate phase, especially the formation of W3O phase. The morphology of reduction of W-Y2O3 powder evolves from hollow spheres to slices, fragments and nano-irregular polygon as the reduction temperature increases. Simultaneously, the average particle size of W-Y2O3 powder decreases significantly with the increase of reduction temperature, while the reduction temperature is 800 °C, the change trend is opposite, but it's still much lower than pure tungsten. The addition of Y2O3 significantly affected the phase transition and microstructure evolution behavior of composite powders. The reduction was started from the surface region of powder, and then in the form of cracks or porous structures extend into the interior of the powder until all the nano-particles were formed, which was able to be explained by “shrinkage fissure - particle rupture” and “nucleation - evaporation - sedimentation” model. Moreover, the core-shell structure and Y2WO6 phase formed by addition of Y2O3 can hamper the chemical vapor transport (CVT) and the formation of WO2(OH)2 phase, thus significantly refining the reduced W-Y2O3 powder(115 nm).