MicroRNA (miRNA) production entails the step-wise processing of primary miRNAs (pri-miRNAs) into precursor miRNAs (pre-miRNAs) and miRNA/* duplexes by Dicing complexes containing DCL1, HYL1 and SE, which are localized in nuclear dicing bodies (D-bodies)1,2. Here, we show that D-bodies are phase-separated condensates. SE forms droplets and drives DCL1, HYL1 and pri/pre-miRNAs into the droplets in vitro, and mutation of SE abrogates the formation of D-bodies in vivo, which indicates that D-bodies arise through SE-mediated phase separation. Disruption of SE phase separation greatly reduces its activity in promoting miRNA processing both in vitro and in vivo. We further show that pre-miRNAs are processed into miRNA/* duplexes in the droplets and, after processing, miRNA/* duplexes are bound by HYL1 and released from the droplets. Our findings provide evidence that efficient miRNA processing depends on the SE-phase-separation-mediated formation of D-bodies and suggest a paradigm that the products made in phase-separated condensates can be shipped out for subsequent processes.