ZnO nanoparticles co-doped with rare earths (RE) and Li were synthesized by the chemical method. The structural properties of the samples were investigated by the X-ray diffraction (XRD) and scanning electron microscope (SEM). The results indicated that RE 3+ and Li + ions were incorporated into the lattice of ZnO and nanoparticles formed. Photoluminescence (PL) measurements of RE and Li co-doped ZnO showed two characteristic green emissions that caused by Er 3+ inner shell transitions of 2 H 11/2 → 4 I 15/2 and 4 S 3/2 → 4 I 15/2 . A schematic of transitions exhibited the transfer of excited energy and the PL enhancement mechanism of co-doped ZnO, in which Gd as a sensibilizer could effectively enhance the luminescence intensity. Moreover, we analyzed the band structures of pure and co-doped ZnO by the full-potential linearized augmented plane wave (FP-LAPW) method, which showed that the Fermi level shifted upward into the conduction band and obtained n-type conductive properties after RE doping.