ZnO–SiO₂ composite films consisting of ZnO nanoparticles embedded in a SiO₂ matrix (ZnO : SiO₂ = 20 : 80 molar ratio) were prepared by the sol–gel technique. Annealing in the range 473–773 K in air, hydrogen and oxygen atmospheres showed high stability of the particle radius due to effective capping within the silica matrix. The optical band gap in the composite films varied in the range 4.23–4.29 eV with variation of particle radius from 1.42 to 1.47 nm due to quantum confinement. Photoluminescence (PL) spectra of ZnO nanoparticles recorded in the range 80–300 K showed two defect level emission bands within 2.38–2.66 eV and the excitonic emission band centred at ~4.22 eV. The effect of atmosphere controlled annealing was also studied with a view to understanding and controlling the visible defect-related luminescence in comparison to the UV excitonic luminescence. It was observed that the intensity of the two defect-related peaks observed in the PL spectrum could be decreased substantially by annealing the films (at ~773 K) in oxygen atmosphere. The intensity ratio of the excitonic peak to the defect level peak could be increased up to 5 : 1 at room temperature (~300 K) and 7 : 1 at low temperature (~80 K).