Highly transparent nanocrystalline zirconia thin films were prepared by the sol–gel dip coating technique. XRD pattern of ZrO 2 thin film annealed at 400°C shows the formation of tetragonal phase with a particle size of 13.6nm. FT-IR spectra reveal the formation of Zr–O–Zr and the reduction of OH and other functional groups as the temperature increases. The transmittance spectra give an average transmittance greater than 80% in the film of thickness 262nm. Photoluminescence (PL) spectra give intense band at 391nm and a broad band centered at 300nm. The increase of PL intensity with elevation of annealing temperature is related to reduction of OH groups, increase in the crystallinity and reduction in the non-radiative related defects. The luminescence dependence on defects in the film makes it suitable for luminescent oxygen-sensor development. The “Red shift” of excitation peak is related to an increase in the oxygen content of films with annealing temperature. The “Blue shift” of PL spectra originates from the change of stress of the film due to lattice distortion. The defect states in the nanocrystalline zirconia thin films play an important role in the energy transfer process.