In this study, we systematically revealed the unique nanocrystallization phenomenon and the microstructural evolution of the LPSO-containing Mg-6Gd-5Y-1Zn-0.3Zr (wt%) alloys during multi-pass cold rotary swaging (RS). In the extruded alloy, the dynamic recrystallized (DRXed) and unDRXed grains, which both contained the lamellar LPSO phase, exerted different influences on the DRX behavior during the RS process. After RS, the coarse unDRXed grains disappeared and transformed into fine DRXed grains, driven by the formation of tensile twins and high-angle grain boundaries. The fine DRXed grains with lamellar LPSO phases suppressed DRX behavior during RS. Non-basal dislocations tend to accumulate near the block-shaped LPSO phase and form dislocation arrays, which, in conjunction with twinning, promote the formation of nanograins. Nanograins preferentially formed at the tips and curved interfaces of the LPSO phases, primarily due to the semi-coherent or incoherent interfaces at the tips and the high roughness of the curved interfaces, which promoted the nucleation of DRX. After six passes of RS processing, the yield strength (YS) significantly increased by 104 MPa, rising from 270 MPa in the extruded alloy to 374 MPa. The increase in YS of Mg-6Gd-5Y-1Zn-0.3Zr alloy could be attributed to dislocation strengthening, texture strengthening, nanograin strengthening, and nanoscale block-shaped LPSO phase strengthening.