We present a comparative investigation of the morphological, structural, and optical properties of vertically aligned ZnO nanowires (NWs) before and after high energy argon ion (Ar(+)) milling. It is found that the outer regions of the as-grown sample change from crystalline to amorphous, and ZnO core-shell NWs with ZnO nanocrystals embedded are formed after Ar(+) milling. Optical properties of the ZnO NWs have been investigated systematically through power and temperature dependent photoluminescence measurements, and the phenomenon of exciton localization as well as the relevant favorable photoluminescence characteristics is elucidated. Interestingly, under high density optical pumping at room temperature, coherent random lasing action is observed, which is ascribed to exciton localization and strong scattering. Our results on the unique optical properties of localized exciton in ZnO core-shell nanostructures shed light on developing stable and high-efficiency excitonic optoelectronic devices such as light-emitting diodes and lasers.