Silica containing uniformly dispersed Ni nanoparticles has been synthesized by a precursor solution method, involving heat treatment and reduction stages, and the transformation of the Si-Ni-O precursor into the composite powder has been investigated systematically to determine the formation mechanism of the nanoparticles. During heat treatment, nickel oxide nanoparticles are found to form simultaneously with the Si-O network, as decomposition of the alkoxy ligand and nucleation of NiO nanoparticles, both occur at around 300 degrees C. The formation of ionically bound Si-O delta(-)-Ni delta+ units plays a key role in anchoring the NiO in the Si-O network and impeding further crystalline growth. Moreover, the formation of the Si-O-2 -Ni2+ interactions in the composite of dispersed NiO in SiO retard the reduction of NiO, resulting in a characteristic microstructure consisting of highly dispersed metallic Ni nanoparticles within an Si-O matrix. This nickel-silica composite is expected to show enhanced reversible hydrogen adsorption, making it attractive for use in separation membranes with high hydrogen selectivity.