Terbium doped YAlO3 composites, with terbium concentrations up to 2.11 at%, were fabricated by co-precipitation in porous anodic alumina films grown on silicon. The presence of the cubic YAlO3 phase was confirmed by x-ray diffraction and FT-IR analysis. The fabricated samples demonstrate photoluminescence (PL) within the range 350–640 nm, which is associated with f–f transitions from the 5D3, 5G6 and 5D4 levels of Tb3+ ion. Additionally, a broad and fast- decaying PL band in the blue range has been observed, which is associated with defect states. Based on PL excitation spectra, the main excitation channel of Tb3+ ions is due to 4f–5d transitions. Excitation bands observed at 235, 270 and 320 nm have been related to the permitted low-spin 5d2 [LS], 5d1 [LS] and forbidden high-spin 5d1 [HS] states, respectively. The PL decay spectra have been measured, with the results analysed using the maximum entropy method; a strong indication of ion–ion interaction has been observed. The distribution of Tb3+ ions in the PAA : YAlO3 structure has been proposed and its influence on optical properties of Tb3+ ions has been discussed.