Interatomic potentials for pure Li and the Mg–Li binary system have been developed based on the second nearest-neighbor modified embedded-atom method formalism. The potentials can describe various fundamental physical properties of pure Li (bulk, point defect, planar defect and thermal properties) and alloy behaviors (thermodynamic, structural and elastic properties) in reasonable agreement with experimental data or higher-level calculations. The applicability of the potential to atomistic investigations on the deformation behavior of Mg alloys and the effect of Li is demonstrated.