Nanocomposite films of Ge/ZnO were prepared on quartz glass substrates by alternate RF sputtering of ZnO and Ge. Formation of nanometer sized Ge particles in the ZnO matrix was observed by transmission electron microscopy. The size of the nanoparticles and their optical properties depended strongly on the temperature of annealing. On increasing the temperature of annealing, the size of the Ge particles reduced and the band gap shifted to the higher energies. The higher energy shift of band gap was attributed to the quantum confinement effect in nanometer size Ge particles. An indirect to direct band gap transition was observed in Ge nanoparticles. (C) 2002 Elsevier Science B.V. All rights reserved.