The effect of an external magnetic field (0-1 T) on the upconversion emission (lambda(exc)=976 nm) of Gd(2)O(3):Er(3+)Yb(3+) nanocrystalline phosphor has been studied. Optical bistability (hysteresis behavior in the intensity of the optical emission) for different transitions of the Er(3+) ion has been observed for a complete cycle of the magnetic field between 0 and 1 T. The phosphor shows paramagnetic behavior, consistent with the presence of Gd(3+) ions, at room temperature. Interaction between induced magnetization in the Gd(2)O(3) host and the intrinsic magnetic moment of the nanosized clusters of Er(3+) and Yb(3+) ion pairs is proposed to be responsible for the hysteresis behavior.