ITO thin films were deposited on glass substrates by d.c. magnetron sputtering with varied oxygen flow rates. It was found that the optical absorption decreases and optical absorption edge has blue shifts with the increasing oxygen flow rate. Oxygen vacancy concentration was characterized and analyzed by XPS. It is shown that the oxygen vacancy concentration increases with oxygen flow rates, which is a different observation from the current understanding. The energy band structures associated with different vacancy concentrations of ITO were calculated using the first-principle based on density functional theory. The calculation results show that the increase of oxygen vacancies induces the increase of bands below Fermi level as well as the presence of a second band gap, which accounts for effects of the oxygen vacancies on the blue shifts. (C) 2013 Elsevier B.V. All rights reserved.