Europium-doped lutetium oxide (Lu2O3:Eu3+) nanophosphors were synthesized via modified combustion technique using urea as the fuel and metal nitrates as oxidants. The pellets prepared from the calcined nanocrystalline powders were vacuum sintered up to 1750 °C leading to very translucent ceramic. The products were characterized by x-ray diffraction to ascertain phase purity. The microstructures reveal the nanocrystalline nature of the powders. We have illustrated the crystallite size dependence and the influence of Eu3+ activation of Lu2O3:Eu3+ nanophosphors on Raman scattering. We have also demonstrated the particle size dependence of emission characteristics of nanophosphors and ceramics. Our results suggest that although the processed ceramics display superior emission characteristics, the nanocrystalline phosphor powders calcined at 1100 °C also display reasonably good emission characteristics, illustrating the possibility of their applications in display technology.