Nanostructured ferritic alloys (NFAs) have been essentially fabricated by mechanical alloying pre-alloyed ferritic powders with Y2O3. In this work, Y2O3 was replaced by Y hydride and more soluble Fe2O3 to prepare NFAs. The microstructural characterization concerning the formation of nanoparticles and mechanical property of NFAs prepared by the novel process were investigated. It is found, during mechanical alloying both Fe2O3 and hydride can be easily dissolved into the ferritic matrix. Coherent Y–Ti–O nanoparticles with a pyrochlore Y2Ti2O7 structure and incoherent Cr-rich oxides were precipitated after the hot consolidation. With an increased milling time, there exists a shift of oxygen from the Cr-rich oxides to Y–Ti–O nanoparticles, resulting in a significantly homogeneous dispersion of nanoparticles. Compared with 14YWT, the NFAs in this work show a combination of high strength and improved ductility. Thus, the addition of Fe2O3 as an oxygen carrier provides an alternate way to adjust the oxygen content, which does not require high energy milling; and the combination of hot forging and hot rolling processes, rather than the hot extrusion are more cost-effective.