Mg-doped ZnO [Zn1−xMgxO ( \({x}_{max}=0.05\) )] nanoparticles have been synthesized by sonochemical reaction method and subjected to various characterizations. Structural analysis shows that lattice constants [a = 3.2495 \(\to\) 3.2482 Å and c = 5.2055 \(\to\) 5.1976 Å)], unit cell volume [V = 47.6007 \(\to\) 47.4940 Å3], grain size (36 –25 nm) and micro-strain [(-0.211 \(\to\) -1.728) x1014 line-m−2] are decreased but the dislocation density has been increased on Mg incorporation. Atomic force microscope (AFM) and transmission electron microscope (TEM) images of Zn1−xMgxO NPs indicate reduction of particle sizes on Mg substitution. Raman spectra exhibit a strong presence of E2 modes [E2Low: 99 cm−1 and E2High: 438 cm− 1], reflecting good crystalline quality of Zn1−xMgxO NPs. Blue shift of IR active A1(TO), E1(TO) modes, optical band gap (Eg= 3.20 \(\to\) 3.39 eV) and near band edge (NBE) peak in photoluminescence (PL) spectra has been observed on Mg substitution. Distinct violet, blue and green emission PL bands have been observed for λex = 370 nm [Eex = 3.35 eV]. Optical transitions in PL are associated to surface defects. X-ray photoelectron spectroscopy study also confirmed the substitution of Mg2+ in ZnO and presence of Vo+ defects Zn1−xMgxO. Surface phonon modes has been observed in Raman and IR spectra of Zn1−xMgxO samples. However, no additional phonon mode(s) associated to impurity phase(s) have been detected. Optical property measurements describe utility of Zn1−xMgxO nanoparticles for application as a band gap engineered optical material.