This thesis presents a novel ZnO-hydrogel based fluorescent colloidal semiconductor nanomaterial system for potential bio-medical applications such as bio-imaging, cancer detection and therapy. The preparation of ZnO nanoparticles and their surface modification to make a biocompatible material with enhanced optical properties is discussed. High quality ZnO nanoparticles with UV band edge emission are prepared using gas evaporation method. Semiconductor materials including ZnO are insoluble in water. Since biological applications require water soluble nanomaterials, ZnO nanoparticles are first dispersed in water by ball milling method, and their aqueous stability and fluorescence properties are enhanced by incorporating them in bio-compatible poly N-isopropylacrylamide (PNIPAM) based hydrogel polymer matrix. The optical properties of ZnO-hydrogel colloidal dispersion versus ZnO-Water dispersion were analyzed. The optical characterization using photoluminescence spectroscopy indicates approximately 10 times enhancement of fluorescence in ZnO-hydrogel colloidal system compared to ZnO-water system. Ultrafast time resolved measurement demonstrates dominant exciton recombination process in ZnO-hydrogel system compared to ZnO-water system, confirming the surface modification of ZnO nanoparticles by hydrogel polymer matrix. The surface modification of ZnO nanoparticles by hydrogel induce more scattering centers per unit area of cross-section, and hence increase the luminescence from the ZnO-gel samples due to multiple path excitations. Furthermore, surface modification of ZnO by hydrogel increases the radiative efficiency of this hybrid colloidal material system thereby contributing to enhanced emission.