The effects of Mg concentration and annealing temperature on the characteristics of nanocrystalline Mg(x)Zn(1 - x)O thin films (where x = 0-0.4) were studied using electron microscopy and photoluminescence. The films were prepared by a sol-gel method. The solid solubility limit of MgO in ZnO for the sol-gel-derived Mg(x)Zn(1 - x)O films in the present study was determined to be ∼ 20 at.%. Microstructural characterization of the films showed that the wurtzite crystallites decrease in size with increase in Mg concentration up to the solubility limit. Increasing Mg concentration beyond the solubility limit resulted in a decrease in crystallinity of the films. The bandgap energy was found to increase with Mg concentration whereas the linewidth first increased and then decreased when the Mg concentration was increased beyond the solubility limit. Photoluminescence properties have been correlated to the microstructure of the films. A growth mechanism for Mg(x)Zn(1 - x)O nanocrystalline films under the present processing conditions has also been proposed.