Dy3+ doped yttrium aluminum garnet (YAG) nanophosphors were synthesized by a co-precipitation method for potential thermographic applications in a liquid media dispersed with fluorescent nanoparticles. The doping concentration and annealing temperature on the structural and optical properties of YAG:Dy were investigated. Pure phase YAG:Dy nanophosphors were obtained by annealing the co-precipitated hydroxide products at above 900 °C. Maximum photoluminescence intensity was observed from 6%Dy doped YAG samples. The effect of measuring temperature between 20 and 350 °C on the photoluminescence spectra of nano YAG:Dy was investigated. A temperature-sensitive change in the peak intensity ratio of 496/457 nm emission lines was demonstrated for such nanophosphors for the first time, suggesting potential applications in temperature monitoring of fuel spray.