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Polycrystalline nanoparticles of Al-doped and Ce-co-doped ZnO were processed through sol)gel co-precipitation. Crystallite sizes determined from XRD were in the range of 10.90 to 48.77 nm. FTIR spectra indicated a stretching mode of Zn-O bond. The insertion of Al and Ce at Zn-O site created Al-O and Ce-O bonds. UV-vis spectra favoured the formation of impurity levels by doping and co-doping. Their overlapping with the conduction band edge led to the reduction of band-gap. Blue-green emission which arises from radiative recombination of a photogenerated hole with an electron occupying oxygen vacancy was observed in photo)luminescence spectra. FESEM suggested granular growth in undoped ZnO which changed to diverse structures such as nano-bar and cluster of elongated grains. Significant improvement in room temperature ferromagnetism (RTFM) was noticed by co-doping of Ce in Al-doped ZnO. Formation of bound magnetic polarons (Ce3+-Vo-Ce3+) was the primary mechanism responsible for the improvement in RTFM. [ABSTRACT FROM AUTHOR]