The aluminothermic reduction and nitridation method using microsized Al powder and nanosized alumina powder was employed to fabricate AlON powder under N2 atmosphere. Single-phase aluminum oxynitride (AlON) can be prepared at a relatively low temperature (1700 °C) with a holding time of 3 h. The powder is ball milled, doped with different amounts of Y2O3 (0.1–0.9 wt%) as a sintering additive, and then shaped into pellets. The pellet sintering is carried out at two relatively low temperatures (1860 and 1880 °C) for 10 h. The transmittance and hardness of the obtained samples varies as the amount of Y2O3 varies. The sample sintered under optimal conditions can reach an ultimate transmittance of 65% with 2 mm thickness. The Vickers hardness of highly transparent AlON ceramic is about 15.95 ± 0.17 GPa, indicating that our method has a promising future in transparent AlON ceramic production. The sintering promoting mechanisms of Y2O3 are also discussed in detail.