Ultrafine nickel oxide nanoparticles were prepared by sol-gel method using a solution of nickel nitrate hexahydrate and ammonium hydroxide and subsequently annealed in air at different temperatures in the range 200-275 C for different hours to vary the particle sizes. They were characterised for phase, purity, structure and sizes by X-ray diffraction and high-resolution transmission electron microscopy. They were found polycrystalline in nature and possessed face-centred cubic (NaCl-type) structure with lattice parameter varying with annealing temperature. The ultrafine structure clearly revealed the formation of hexagons with average diameter about 5 nm. Ultraviolet-visible absorption spectroscopy was carried out to study the optical properties and for the estimation of the bandgap. The nanoparticles exhibited weak and strong quantum confinement in the size ranges of 10.47-8.47 and 6.57-5 nm. The samples were then investigated through positron annihilation spectroscopy to characterise and closely monitor the evolution of vacancy-type defects and defect clusters during particle growth in the samples. The positron lifetime drastically increased at very low particle sizes, supporting the confinement effects demonstrated by optical absorption studies. The results from coincidence Doppler broadening measurements were consistent and indicated changes also in the electron momentum distribution during the occurrence of these finite size effects in the nanoparticles.