We have demonstrated the enhanced photoluminescence and photoconducting characteristics of plasmonic Ag–ZnO films due to the light scattering effect from Ag nanoislands. Ag nanoislands have been prepared on ITO-coated glass substrates by thermal evaporation followed by annealing. Plasmonic Ag–ZnO films have been fabricated by depositing ZnO over Ag nanoislands by sol–gel process. The band-edge emission of ZnO is enhanced for 170 nm sized Ag nanoislands in ZnO as compared to pure ZnO. The defect emission is also found to be quenched simultaneously for plasmonic Ag–ZnO films. The enhancement and quenching of photoluminescence at different wavelengths for Ag–ZnO films can be well understood from the localized surface plasmon resonance of Ag nanoislands. The Ag–ZnO M–S–M photoconductor device showed a tenfold increment in photocurrent and faster photoresponse as compared to the control ZnO device. The enhancement in photoresponse of the device is due to the increased photon absorption in ZnO films via scattering of the incident illumination.