Pure and a series of Fe3+ doped zirconia nanopowders were synthesized combining colloidal chemistry and solvothermal method from organometallic precursors in order to correlate doping and properties of zirconia matrix. After annealing of washed nanopowders at 600 °C, detailed characterization was performed using X-ray diffraction, UV/Vis absorption and luminescence, infrared and electron paramagnetic spectroscopy, transmission electron microscopy and BET measurements. Zirconia samples had mixed monoclinic and tetragonal crystalline phase; increasing Fe3+ ions concentration was followed by increasing of tetragonal phase share. In the sample with highest Fe3+ concentration, hematite can be detected. Also, UV/Vis spectrophotometry showed that Fe3+ doping lowers effective band gap of zirconia matrix from 4.5 eV (bulk value) to 2.1 eV for doped/nanocomposite samples. EPR measurements proved presence of dopant and showed that isolated Fe3+ ions in zirconia matrix exist in both crystalline phases; monoclinic and tetragonal (g ~ 4.8 and g ~ 4.27–4.2, respectively) surroundings. Zirconia samples were also successfully used as photocatalysts for photocatalytic degradation of 2, 4, 6, trichlorophenol.