Magnesium-substituted lithium ferrite powders (Li1−xMg2xFe5−xO8 where x = 0.0–0.8) were prepared by sol–gel auto-combustion method. XRD profiles revealed that all compositions were single cubic ferrite structure for the precursors annealed at 800 °C for 2 h. The crystallite size was found to decrease whereas the lattice parameter was increased with increasing Mg2+ ion content. The microstructure of the formed powders was Mg concentration dependent. Increasing the Mg2+ ion ratio was found to inhibit the grain growth of the formed ferrite. The AC electrical conductivity of Mg2+ ion substituted lithium ferrite samples was raised with increasing the concentration of Mg2+ ions as the result of increasing the hopping of electrons between Fe2+ and Fe3+ ions. Meanwhile, dielectric constant (ε′) was diminished with increasing the frequency of external electric field as well as increasing the temperature and concentration of Mg2+ ions. Alongside, the formed crystalline magnesium substituted lithium ferrite had good magnetic properties. High saturation magnetization (78.7 emu/g) was attained by the formed ferrite sample at Mg2+ molar ratio of 0.4 annealed at 800 °C for 2 h.