A crystalline and highly luminescent nanoparticle red phosphor with average particle size of 35 nm (nominal 4 mol% Eu in Y2O3) was prepared using flash heat-treatment of a nanoparticle precursor (crystals of the corresponding doped oxyhydroxide). The nanoparticle precursors (which also show strong red emission over the 600–630 nm region under broad UV excitation from transitions of 5D0 → 7F2 in europium) were prepared in a single step using a continuous hydrothermal process (utilising supercritical water) operated at ca. 380 °C and 24.1 MPa. Photoluminescence (PL) and time-resolved PL measurements were performed on selected heat-treated nanomaterials and revealed a significantly extended lifetime of >2.25 ms (bulk material typically ca. 1.7 ms). Increases in the emission lifetime as a function of increased heat-treatment time were attributed to inter-particle effects. Surface-functionalized nanoparticles were prepared and further evaluated as probes for biological imaging with the initial precursor phosphor and the highly luminescent oxide variant both being clearly resolved in cell imaging studies under an excitation of 470 nm, using a wide pass band filter centered at 640 nm. Thus, the method employed herein holds promise for readily formulated stable colloids for luminescent security inks and as biological imaging probes.