Fe-doped ZnO nanocrystals are successfully synthesized and structurally characterized by using x-ray diffraction and transmission electron microscopy. Magnetization measurements on the same system reveal a ferromagnetic to paramagnetic transition temperature above 450 K with a low-temperature transition from the ferromagnetic to the spin-glass state due to canting of the disordered surface spins in the nanoparticle system. Local magnetic probes like electron paramagnetic resonance and Mössbauer spectroscopy indicate the presence of Fe in both valence states Fe 2+ and Fe 3+ . We argue that the presence of Fe 3+ is due to possible hole doping in the system by cation ͑Zn͒ vacancies. In a subsequent ab initio electronic structure calculation, the effects of defects ͑e.g., O and Zn vacancies͒ on the nature and origin of ferromagnetism are investigated for the Fe-doped ZnO system. Electronic structure calculations suggest hole doping ͑Zn vacancy͒ to be more effective to stabilize ferromagnetism in Fe-doped ZnO and our results are consistent with the experimental signature of hole doping in ferromagnetic Fe-doped ZnO samples.