We report a simple method for the synthesis of ultra-fine Eu(3+)-doped yttria (Y(2)O(3)) nanophosphors with an average diameter of approximately 5 nm for development of a transparent colloid that could be used as a luminescent security ink. This has been achieved by suitably substituting Eu(3+) ions at the favorable C(2) symmetry sites of Y(3+) ions and quantum mechanically confining the growth of the nanophosphor using a novel acid-catalyzed sol-gel technique. This is one of the few reports that depict the development of a transparent aqueous-stable Y(2)O(3):Eu(3+) colloidal solution for strategic applications related to security codes. High resolution transmission electron microscopy images showed excellent lattice fringes that in turn support the presence of better crystal quality and enhanced photoluminescence (PL) emission from the Y(1.9)O(3)Eu(0.1)(3+) nanophosphor system. Time resolved emission spectroscopy measurement indicated a PL decay time in the range of a few milliseconds, suitable for making luminescent security ink and other advanced applications in optoelectronic devices and bio-labeling.