To study the requirements of the power supply in micro-arc oxidation (MAO) of magnesium alloy, many experiments were performed under the DC, unipolar, and ambipolar pulse output modes. Based on the experimental results and electric arc theory, the separate local arc discharge mechanism was put forward. It is considered that magnesium MAO process consists of three stages including anodic oxidation, micro-arc oxidation, and large-arc discharge in turn with increasing source voltage. The MAO film is composed of metal oxides that resulted from numerous discrete local arc discharges, which accumulate the non-equilibrium structure after undergoing sudden heating and cooling cycles. Separate local arc discharge is caused by the process in which the oxygen-based gas is ionized in the conduct channel bearing electric field intensity, changed from insulator to conductor that presents sharp negative resistance effect, and produced partially high temperature to ignite locally metal oxidation. The local arc discharge model is described as four courses: gas created from electrolysis, arc discharge, metals oxidization, and cooling and shrinking of oxides. The purpose of pulse supply is to inhibit the large-arc discharge by intervening proper cooling time, which cannot be actualized by a unipolar pulse mode because of the strong capacitive load characteristics but can be reached by an ambipolar pulse supply because the negative pulse period acts as cooling time. Using a discharge loop to remove the influence of load capacitive, a new type of pulse power supply for MAO is developed, so that the large-arc problem is resolved effectively, the film-forming efficiency is improved, and the pollution of the film and electrolyte caused by negative voltage is avoided.