This study investigated the effect of magnesium application on peanut growth and yield under two nitrogen (N) application rates in acidic soil in southern China. The chlorophyll content, net photosynthetic rate and dry matter accumulation of the N-sensitive cultivar decreased under reduced N treatments, whereas no effect was observed on the relevant indicators in the N-insensitive variety GH1026. Mg application increased the net photosynthetic rate by increasing the expression of genes involved in chlorophyll synthesis and Rubisco activity in the leaves during the pegging stage under 50%N treatment, while no effect on the net photosynthetic rate was observed under the 100%N treatment. The rate of dry matter accumulation at the early growth stage, total dry matter accumulation and pod yield at harvest increased after Mg application under 50%N treatment by increasing the transportation of assimilates from stems and leaves to pods in both peanut varieties, whereas no effect was found under 100%N treatment. Moreover, Mg application increased the NUE under 50%N treatment. No improvement of NUE in either peanut variety was found under 100%N treatment, while Mg application under the 50%N treatment can obtain a higher economic benefit than the 100%N treatment. In acidic soil, application of 307.5 kg ha−1 of Mg sulfate fertilizer under 50% reduced nitrogen application is a suitable fertilizer management measure for improving carbon assimilation, NUE and achieve high peanut yields in southern China.