Disclosed is a magnesium alloy that has high thermal conductivity and flame retardancy and facilitates plastic working, wherein magnesium is added with 0.5 to 5 wt % of zinc (Zn) and 0.3 to 2.0 wt % of at least one of yttrium (Y) and mischmetal, with, as necessary, 1.0 wt % or less of at least one selected from among calcium (Ca), silicon (Si), manganese (Mn) and tin (Sn), the total amount of alloy elements being 2.5 to 6 wt %. A method of manufacturing the same is also provided, including preparing a magnesium-zinc alloy melt in a melting furnace, adding high-melting-point elements in the form of a master alloy and melting them, and performing mechanical stirring during cooling of a cast material in a continuous casting mold containing the magnesium alloy melt, thus producing a magnesium alloy cast material having low segregation, after which a chill is removed from the cast material or diffusion annealing is performed, followed by molding through a tempering process such as rolling, extrusion or forging. This magnesium alloy is improved in ductility by the action of alloy elements for inhibiting the formation of lamella precipitates due to a low-melting-point eutectic phase in a magnesium matrix structure, can be extruded even at a pressure of 1,000 kgf/cm2 or less due to the increased plasticity thereof, and can exhibit thermal conductivity of 100 W/m·K or more and flame retardancy satisfying the requirements for aircraft materials and is thus suitable for use in fields requiring fire safety, thereby realizing wide application thereof as a heat sink or a structural material for portable appliances, vehicles and aircraft components and contributing to weight reduction.