Nanopowders of yttrium aluminium garnet Y3Al5O12 (YAG) doped with neodymium ions were obtained by the co-precipitation method from the reaction of aluminium and yttrium nitrate and neodymium oxide with ammonia. After washing and drying the hydroxide precursors were calcined at 500, 700, 800 and 900 °C for 1 hour and at 1000 °C for 3 hours. This product was treated by ball milling in a zirconia vial for 0.5, 1.5 and 10 h in order to achieve smaller nanoparticles. The structure, microstructure, morphology and optical properties were investigated by means of diffractometric, microscopic and spectroscopic techniques. The course of the amorphous-to-crystalline transformation was complete after calcining the powder for 1 hour at 900 °C. In the sample calcined for 3 hours at 1000 °C, the mean size of crystallite microdomains was reduced from 600 Å to 300, 250 and 160 Å after 0.5, 1.5 and 10 h of mechanical treatment respectively. The treated product was found to be contaminated with ZrO2. This contamination, from the vial and hardened ZrO2 balls reaches ca. 30 wt % after 10 h of mechanical treatment but causes only a slight reduction of the neodymium luminescence life-time, thus maintaining significant applicative properties.