Ion implantation and thermal processing techniques have been used to form embedded ferromagnetic nanophase precipitates and thereby create magneto-optically active near-surface regions on otherwise inactive materials. Ferromagnetic precipitates were formed by first implanting Fe+ or Ni− into Y0.15Zr0.85O1.93(YSZ) with an implant energy of 140 keV, a fluence of 8.0 × 1016 ions/cm2, and at a temperature of-189°C. After implantation, the specimens were annealed at temperatures ranging from 500 to 1100°C in several types of reducing atmospheres. X-ray diffraction and TEM analysis of the Fe- or Ni-implanted/annealed specimens revealed that crystallographically coherent precipitates of metallic α-Fe, magnetite (Fe3O4), or Ni could be formed in YSZ depending on the annealing conditions. In particular, the cooling rate was established as the critical factor that determined whether Fe or Fe3O4 precipitates were created. Magneto-optical effects arising from ferromagnetic precipitates of Fe, Fe3O4, and Ni in the near-surface region of YSZ were observed and characterized using magnetic circular dichroism (MCD). The magneto-optical response of the α-Fe, Fe3O4, and Ni precipitates was markedly different as indicated by the MCD-detected hysteresis curves. The precipitation mechanism, the chemical nature of the precipitates, and the particle-size distributions resulting from different annealing conditions were investigated and correlated with the precipitate magneto-optical properties.