The electronic structure and magnetism of nanocrystalline graphite prepared by ball milling of graphite in an inert atmosphere have been investigated using valence band spectroscopy (VB), core level near-edge X-ray absorption fine structure (NEXAFS) spectroscopy and magnetic measurements as a function of the milling time. The NEXAFS spectroscopy of graphite milled for 30 hours shows simultaneous evolution of new states at ~284.0 eV and at ~290.5 eV superimposed upon the characteristic transitions at 285.4 eV and 291.6 eV, respectively. The modulation of the density of states is explained by evolution of discontinuities within the sheets and along the fracture lines in the milled graphite. The magnetic measurements in the temperature interval 2-300-2 K at constant magnetic field strength show a correlation between magnetic properties and evolution of the new electronic states. With the reduction of the crystallite sizes of the graphite fragments, the milled material progressively changes its magnetic properties from diamagnetic to paramagnetic with contributions from both Pauli and Curie paramagnetism due to the evolution of new states at ~284 and ~290.5 eV, respectively. These results indicate that the magnetic behaviour of ball-milled graphite can be manipulated by changing the milling conditions.