In order to study the strengthening mechanism of shot peening (SP) on fatigue performance of Mg-Gd-Y alloy, microstructures of Mg-Gd-Y alloy substrate and SP samples were characterized by SEM, TEM and XRD, surface hardness and surface residual stresses were measured by Vickers hardness tester and X-Ray residual stress analysis system, and rotary bending fatigue performance was tested by electro-hydraulic fatigue testing machine. The results showed that, severe plastic deformation occurred on the near-surface of SP sample and produced gradient micro-nanostructure, including nanocrystalline layer, sub-grain layer and deformation layer. The surface hardness increased from 85 HV0.5 of substrate to 136 HV0.5 of SP sample, and the surface residual compressive stress was induced. The high-frequency fatigue strength of SP sample rose to 125 MPa, indicating the significant improvement of fatigue performance of Mg-Gd-Y alloy after SP treatment.