The observation of ferromagnetism in the transition metal (TM) doped wide band gap nonmagnetic semiconductor ZnO opened up a new area of research because of the potential applications in spintronics devices. These ZnO based diluted magnetic semiconductors (DMS) combine their transport and optical properties with magnetism. We have carried out synthesis and studies on the magnetic and optical properties on TM doped ZnO powders in nanocrystalline form. Our studies give evidence for the origin of ferromagnetism as extrinsic due to the presence of metal nanoclusters as secondary phases in the Co and Ni doped ZnO systems although the optical and electronic structure studies indicate the incorporation of divalent metal ions inside the ZnO crystal lattice.