Microstructural and optical properties of Zn1-yLiyO (0.00 ≤y ≤0.10) nanoparticles are investigated. Li incorporation leads to substantial changes in the structural characterization. From micro-structural analysis, no secondary phases or clustering of Li was detected. Elemental maps confirmed homogeneous distribution of Li in ZnO. Sharp UV peak due to the recombination of free exciton and defects based luminescence broad visible band was observed. The transition from the conduction band to Zinc vacancy defect level in photoluminescence spectra is found at 518±2.5nm. The yellow luminescence was observed and attributed to Li related defects in doped samples. With increasing Li doping, a decrease in energy bandgap was observed in the range 3.26±0.014 to 3.17±0.018eV. The bandgap narrowing behavior is explained in terms of the band tailing effect due to structural disorder, carrier-impurities, carrier-carrier, and carrier-phonon interactions. Tuning of the bandgap energy in this class of wide bandgap semiconductor is very important for room temperature spintronics applications and optical devices. © 2014 AIP Publishing LLC.