We report systematic investigations on structural, magnetic and optical properties of NiO nanoparticles prepared by mechanical alloying. As-milled powders exhibit face centred cubic structure, but average particle size decreases and effective strain increases for the initial periods of milling. Lattice volume increases monotonically with a reduction in particle size. Antiferromagnetic NiO particles exhibit significant room temperature (RT) ferromagnetism with modest moment and coercivity. A maximum moment of $0.0147~{\mu_{\rm B}}/\hbox{f.u}$ at 12 kOe applied field and a coercivity of 160 Oe were obtained for 30 h milled NiO powder. Exchange bias decreases linearly with a decrease in NiO particle size. Thermo-magnetization data reveal the presence of mixed magnetic phases in milled powders and shifts magnetic phase transition towards high temperature with increasing milling. Annealing of milled NiO powder and photoluminescence studies show a large reduction in RT magnetic moment and blue-shifting of band edge emission peak. The observed properties are discussed on the basis of finite size effect, defect density, oxidation/reduction of Ni, increase in number of sublattices, uncompensated spins from surface to particle core, and interaction between uncompensated surfaces and particle core with lattice expansion.