We investigated the optical absorption of the fundamental band edge and the origin of the emission from β-FeSi2 nanoparticles synthesized by ion-beam-induced epitaxial crystallization of Fe+ implanted SiO2/Si(100) followed by thermal annealing. From micro-Raman scattering and transmission electron microscopy measurements it was possible to attest the formation of strained β-FeSi2 nanoparticles and its structural quality. The optical absorption near the fundamental gap edge of β-FeSi2 nanoparticles evaluated by spectroscopic ellipsometry showed a step structure characteristic of an indirect fundamental gap material. Photoluminescence spectroscopy measurements at each synthesis stage revealed complex emissions in the 0.7–0.9 eV spectral region, with different intensities and morphologies strongly dependent on thermal treatment temperature. Spectral deconvolution into four transition lines at 0.795, 0.809, 0.851, and 0.873 eV was performed. We concluded that the emission at 0.795 eV may be related to a radiative direct transition from the direct conduction band to an acceptor level and that the emission at 0.809 eV derives from a recombination of an indirect bound exciton to this acceptor level of β-FeSi2. Emissions 0.851 and 0.873 eV were confirmed to be typical dislocation-related photoluminescence centers in Si. From the energy balance we determined the fundamental indirect and direct band gap energies to be 0.856 and 0.867 eV, respectively. An illustrative energy band diagram derived from a proposed model to explain the possible transition processes involved is presented.