Reduced pressure laser welding is known to provide enhanced penetration depth and reduced defects. The effect of atmospheric pressure on the weld formation and physical process of laser welding has been well investigated, while the effect of atmospheric composition is rarely reported. In this work, the effect of residual oxygen content in reduced pressure laser beam welding of magnesium alloy was systematically investigated. The experimental results showed the residual oxygen content in the low vacuum had a significant effect on the weld formation of magnesium alloy. With the residual oxygen content increase from 0.297 to 29.7 mg/L under the reduced pressure of 10 kPa, the penetration depth of laser welds of magnesium alloy increases while the weld width decreases. The humps and discontinuous weld formation were observed when the oxygen content was higher than 11.9 mg/L. Molten pool behaviors and interaction of laser and plasma plume for different residual oxygen contents was experimentally and theoretically studied. The spatter occurred accompanied with the oxidation film for the high oxygen content. The large droplet was dragged back to the molten pool. It gradually grew up with the continuous large energy absorbed and then solidified in the oxide film, leading to the hump defects. Besides, the welding plume was gradually suppressed and the condensation particles increased with the decrease of the oxygen content. The residual oxygen content also has an obvious effect on the size and distribution of the condensed metal particles in the plasma plume. The interaction between laser and the plasma plume are the main reason which results in the change of weld formation of different residual oxygen content.