This paper describes a new method for the synthesis of zinc oxide nanoparticles using ethanol-in-oil microemulsions with Zn-DEHSS (diethylhexyl sulfosuccinate) as surfactant. The zinc oxide nanoparticles find application in varistors and other functional devices. These particles have been characterized by X-ray diffraction, TEM, and BET surface area. Microemulsion droplets were characterized by quasi elastic light scattering (QELS). Varistors formed from doped zinc oxide nanoparticles finds application as low voltage surge devices with low leakage current and high coefficient of nonlinearity (alpha). In this paper, we have shown that the critical voltage of the varistor is related to the grain size which is related to size of ZnO particles. The smaller ZnO particles lead to larger grain size, thereby lowering the critical voltage.