Nanocrystalline Ag/MgO composites were prepared by the ultrafine-powder-compaction method. The structure was investigated for the first time by high-resolution electron microscopy. Nanometre-sized Ag grains and MgO grains in the composites bonded directly without any intermediate phase layer. Certain preferred orientation relationships were observed between the Ag and MgO grains. The nanocrystalline Ag/MgO composites retained their grain size during annealing up to 873 K. Vickers microhardness measurements were performed on the as-compacted and annealed specimens. Generation and propagation of cracks were less active in the nanocrystalline Ag/MgO composites than in a single-phase nanocrystalline MgO. The Vickers microhardness of the nanocrystalline Ag/MgO composites remained up to 1073 K. Hot-pressing deformation tests showed that the nanocrystalline Ag/MgO composites deformed plastically at 1073 K.