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Fe₂O₃ of particle sizes ranging from 120 to 20 nm has been prepared by the ball-milling process using different milling hour. X-ray diffraction technique and transmission electron microscopy have been used for determining the average particle sizes of the prepared samples. Direct optical band gap for the unmilled and the ball-milled samples has been calculated from the optical absorption data. A red shift in the band gap due to the reduction of particle size has been observed. The coincidence Doppler broadening of the electron positron annihilation γ-radiation spectroscopy has been employed to identify the nature of defects generated due to the ball-milling process.