The position of activator ions in the lattice has a fundamental effect on the luminescent properties of phosphors. In this paper, we describe the normal and defect sites of Eu³⁺ ions in a Y₂O₃ crystal lattice, their interaction and difference in physical properties. Analytically detectable amounts of defect sites reached in Y₂O₃:Eu³⁺ nanopowders with an average size of 40–50 nm were synthesized by a novel combined Pechini-foaming method. The luminescence properties of Eu³⁺ ions in defect sites are most pronounced in highly doped nanocrystalline powders (32 and 40 at%). To explain this phenomenon we suggest the mechanism of irreversible energy transfer from normal to defect sites of Eu³⁺ ions.