The effect of water addition into the precursor powders consisting of ultrafine La(OH)3 particles and MoO2 powders on the microstructure and tensile mechanical properties of a Mo-0.5La (wt%) alloy has been studied. The results showed that the water addition improved the homogeneity of the La(OH)3 particles in the precursor powders after mechanical blending. The average powder size of the hydrogen-reduced Mo–La powders was nearly unchanged regardless of the water addition, while the apparent density was remarkably increased with the increase in the amount of water addition. A polycrystalline phase that has a chemical formula of La5Mo4O16 and a subgrain size of 0.2∼1 μm was discovered in the hydrogen-reduced powders. This means that a small portion of the powders were transformed into composite powders during the hydrogen reduction process. Particularly, this La-containing polycrystalline phase can decompose during sintering, and the decomposition may activate and promote the grain growth kinetics. A similar effect also occurred due to the doping form of La(OH)3 which underwent decomposition during sintering as well. After sintering, the grain size of the alloy was found to depend on the quantity of the water addition. As the water addition was increased from 0 to 0.15 L/Kg, the grain size was increased from a typical size of 60–80 μm up to an extraordinarily large size of 1000–3000 μm. Interestingly, this drastic grain coarsening did not deteriorate the mechanical properties of the alloy, but improved the ultimate tensile strength from 367 to 457 MPa which is a value comparable to that of the Mo-0.5La alloy fabricated with the more conventional solid-liquid doping route, on condition that the relative sintering density can reach above 98%. The improved ultimate tensile strength can be attributed to the change in the fracture mechanism from a nearly fully intergranular mode to a mixed transgranular and intergranular mode.