Yb3+-activated Lu2O3 is known to exhibit excellent thermal conductance, which can be a potential candidate to develop high-power laser fiber. Here we report the synthesis of Yb3+-activated Lu2O3 nanoparticles following the homogeneous coprecipitation method along with their material and optical characterization. Five different samples were synthesized using different concentrations of Cetyl Trimethyl Ammonium Bromide (CTAB) as a cationic surfactant, Yb–Lu ratio in the presence/absence of aluminium (Al) as an additional dopant, followed by calcination at different temperatures. Differential thermal analysis (DTA) and thermogravimetry (TG) analysis were performed to optimize the thermal annealing condition while the X-ray diffraction (XRD) analysis shows the formation of a pure bixbyite structure with an average particle size of ∼ 15 nm at 800°C that reaches up to ∼ 120 nm with increasing calcination temperature to 1400°C. The field emission scanning electron microscope (FESEM) analysis shows nearly cubic morphology while high-resolution Transmission Electron Microscope (HRTEM) analysis confirms the crystalline nature and the average particle size corroborates with the XRD analysis result. The developed nanoparticle was found to exhibit characteristics of Yb-absorption and emission peaks showing no interference with Lu2O3. The emission intensity and fluorescence lifetime of the Yb3+-activated Lu2O3 nanoparticles were found to depend on the Yb concentration, average particle size, and presence of aluminium as a co-dopant. To evaluate the practical application of the developed nanoparticles, an optical preform is developed using synthesized nanoparticles as Yb-source through modified chemical vapor deposition (MCVD) coupled with solution doping (SD) technique and the initial performance of the preform is also reported.