Yttrium aluminum garnet (YAG) nanopowders doped with high neodymium (Nd) content (3 at.%) were synthesized by the sol-gel processing of (i) alkoxide precursors and (ii) metal chelates formed by complexing the cations with polyethylene glycol. A stoichiometric YAG composition was obtained following both procedures; however, the agglomeration of particles was significantly higher in glycolate synthesis, which shielded residual organics from oxidation (elemental analyses). Distribution of Nd3+ ions in the YAG matrix, as shown by the absorption of pump energy and photoluminescence spectra of Nd:YAG ceramics, was more homogeneous in alkoxide-derived powders. The segregation of Nd centers in the glycolate-derived sample was supported by the precipitation of a crystalline Nd2O3 phase (X-ray diffraction) during sintering. High-resolution absorption spectra (I-4(9/2)(1)-> F-4(9/2)(1)) of the powders showed that a higher absorption cross-section of glycolate-derived powders is due to Nd3+-Nd3+ ion pairing, which leads to the quenching of photoluminescence. Owing to the better dispersion of optically active centers, the photoluminescence signal was found to be substantially enhanced in alkoxide-derived Nd:YAG ceramics.