This paper investigates the interaction between Si nanoclusters ͑Si-nc͒ and Er in SiO 2 , reports on the optical characterization and modeling of this system, and attempts to clarify its effectiveness as a gain material for optical waveguide amplifiers at 1.54 m. Silicon-rich silicon oxide layers with an Er content of 4 -6 ϫ 10 20 at./ cm 3 were deposited by reactive magnetron sputtering. The films with Si excess of 6 -7 at. %, and postannealed at 900°C showed the best Er 3+ photoluminescence ͑PL͒ intensity and lifetime, and were used for the study. The annealing duration was varied up to 60 min to engineer the size and density of Si-nc and optimize Si-nc and Er coupling. PL investigations under resonant ͑488 nm͒ and nonresonant ͑476 nm͒ pumping show that an Er effective excitation cross section is similar to that of Si-nc ͑ϳ10 −17 -10 −16 cm 2 ͒ at low pumping flux ͑ϳ1016 -10 17 cm −2 s −1 ͒, while it drops at high flux ͑Ͼ10 18 cm −2 s −1 ͒. We found a maximum fraction of excited Er of about 2% of the total Er content. This is far from the 50% needed for optical transparency and achievement of population inversion and gain. Detrimental phenomena that cause depletion of Er inversion, such as cooperative up conversion, excited-stated absorption, and Auger deexcitations are modeled, and their impact in lowering the amount of excitable Er is found to be relatively small. Instead, Auger-type short-range energy transfer from Si-nc to Er is found, with a characteristic interaction length of 0.4 nm. Based on such results, numerical and analytical ͑Er as a quasi-two-level system͒ coupled rate equations have been developed to determine the optimum conditions for Er inversion. The modeling predicts that interaction is quenched for high photon flux and that only a small fraction of Er ͑0.2-2 %͒ is excitable through Si-nc. Hence, the low density of sensitizers ͑Si-nc͒ and the short range of the interaction are the explanation of the low fraction of Er coupled. Efficient ways to improve Er-doped Si-nc thin films for the realization of practical optical amplifiers are also discussed.