This paper systematically investigated the influence of sintering atmospheres, vacuum, and oxygen, on the microstructure and optical properties of Y₂O₃ ceramics. Compared with vacuum sintering, sintering in flowing oxygen atmosphere can effectively inhibit the grain growth of Y₂O₃ ceramics at the final stage of sintering and improve the uniformity of microstructure. After hot isostatic pressing, the samples pre-sintered at oxygen atmosphere showed good in-line transmittance from a visible-to-mid-infrared wavelength range (0.4–6.0 μm) except in the range of 2.8–4.1 μm. Spectral analysis showed that an obvious broadband absorption peak (2.8–4.1 μm) of characteristic hydroxyl groups is detected in the above samples. However, before densification, a low-temperature heat treatment at 600 °C under vacuum can effectively diminish the hydroxyl groups in Y₂O₃ ceramics. However, laser experiments in the ~1 μm wavelength range showed that although the Yb:Y₂O₃ ceramic carrying hydroxyl had obvious absorption in the 2.8–4.1 μm range, it had little effect on its laser oscillation in the ~1 μm wavelength. Yb:Y₂O₃ ceramics pre-sintered in an oxygen atmosphere at 1460 °C followed by hot isostatic pressing at 1440 °C achieved 12.85 W continuous laser output at room temperature, with a laser slope efficiency of 84.4%.