Red emitting cubic Y2O3:Eu3+ nanophosphor with an average particle size in the range of 10-20 nm was synthesized using a more facile gel-polymer pyrolysis process. The maximum relative luminescence yield obtained for the nanophosphor prepared with a urea and PVA combination is about 30% in relation to the bulk Y2O3:Eu3+ industrial red phosphor. The photoluminescence excitation spectrum monitoring the dominant hypersensitive D-5(0) --> F-7(2) red emission of Eu3+ Comprises two parts, viz., the dominant Eu3+-O-2 charge-transfer band and a weak excitonic band (or its tail) corresponding to the Y3+-O2- host matrix absorption. The relative strengths of these two bands have a strong dependence on the particle size. Furthermore, in this nanocrystalline insulator system having a band gap of about 6 eV, it is possible to observe a size dependent blue shift (similar to 600 cm(-1)) in the photoluminescence excitation band corresponding to the Urbach tail region of the yttria host matrix. Both the bulk and nanocrystalline Y2O3:Eu3+ show storage luminescence, a phenomenon previously unknown in this system. The mechanisms responsible for this appear to be different in these systems. The storage luminescence in the bulk system can be attributed to lattice defects, whereas that in the nanocrystalline counterpart is from a meta-stable, photoinduced surface-states arising from chemisorbed species.