The invention relates to a flame-retardant foam magnesium alloy and a preparation method thereof, in particular to magnesium-based alloy taking rare earth metal as secondary main component. The flame-retardant foam magnesium alloy takes Mg-Y-Dy ternary alloy as base material, and comprises the components by atom percent: 98.8-99.5% of Mg, 0.05-0.3% of Y and 0.45-0.9% of Dy; the range of average pore size is 0.5-4mm, and the range of average porosity is 70-89%; the preparation method combines the advantages of fusant foaming method and powder metallurgy, and adopts fusant foaming two-step technique. The flame-retardant foam magnesium alloy prepared by the method not only enhances the mechanical property of flame-retardant magnesium alloy products, but also improves the quality of the foam magnesium alloy, thus enlarging the application scope of the magnesium alloy products.