Hybrid organic-inorganic nanocomposites employ metal oxides to improve the charge transport properties and stability of the conjugated polymer. They are considered one of the most interesting candidates for optoelectronic applications. This article presents a detailed investigation on the influence of defective electronic states of MgO nanoparticles on the photophysical properties and photostability of a conjugated polymer, poly[2-methoxy-5-(2-ethylhyxyloxy)-1,4-phenylene vinylene] (MEH-PPV). Since MgO is an insulator (Eg - 7.8 eV), defect states were induced to improve the delocalization of electrons and conductivity. These defect-induced MgO nanoparticles accounted for the enhanced absorbance in the hybrid polymer nanocomposites. The nanocomposites demonstrated photoluminescence (PL) quenching owing to the transfer of electrons from MEH-PPV to the defective energy levels (oxygen vacancies) of MgO. The photoinduced electron transfer was confirmed through solvent and temperature-dependent PL analysis, and also through electrochemical analysis. The MEH-PPV/MgO nanocomposite displayed 23% PL quantum efficiency. An improvement in photostability was observed due to the reduction in the polymer chain defects, prevention of oxygen diffusion by MgO nanoparticles, inhibition of moisture intervention by improving the hydrophobicity of nanocomposites, and most importantly, transfer of electrons from the polymer to oxygen vacancies, which prohibited superoxide formation. Hence, this work validates the role of oxygen vacancies of MgO nanoparticles in the PL quenching and photostability enhancement of MEH-PPV.