Well-dispersed undoped and Mg-doped ZnO nanoparticles with different doping concentrations at various annealing temperatures are synthesized using basic chemical solution method without any capping agent. To understand the effect of Mg doping and heat treatment on the structure and optical response of the prepared nanoparticles, the samples are characterized using X-ray diffraction (XRD), energy-dispersive X-ray (EDX), UV–Vis optical absorption, photoluminescence (PL), scanning electron microscopy (SEM) and transmission electron microscopy (TEM) measurements. The UV–Vis absorbance and PL emission show a blue shift with increasing Mg doping concentration with respect to bulk value. UV–Vis spectroscopy is also used to calculate the band-gap energy of nanoparticles. X-ray diffraction results clearly show that the Mg-doped nanoparticles have hexagonal phase similar to ZnO nanoparticles. TEM image as well as XRD study confirm the estimated average size of the samples to be between 6 and 12 nm. Furthermore, it is seen that there was an increase in the grain size of the particles when the annealing temperature is increased.