Colloidal Bi/Bi2O3 nanoparticles were synthesized by pulsed Nd:YAG laser ablation of metallic bismuth target. Structural characterization and optical properties of Bi/Bi2O3 nanoparticles have been studied. Moreover mechanism of nanoparticles formation and oxidation of Bi nanoparticles were proposed, according to experimental data from UV vis spectroscopy and calculation of optical properties. SEM and XRD analyses indicate the formation of Bi2O3 nanoparticles with mean size of 27 +/- 4 nm which are mixing of four phases including rhombohedra crystal structure of Bi, Bi(OH)(3), monoclinic alpha-Bi2O3 and tetragonal beta-Bi2O3. In addition, optical extinction of Bi2O3 nanoparticles can be fine-tuned in the visible spectral region by tailoring the oxide radii in nanoparticles. Overall synthesis of Bi2O3 nanoparticles by laser ablation in deionized water with high purity and controllable oxide shell illustrating a relatively effective technique for nanoparticle synthesis. Finally, photo catalytic activity of Bi/Bi2O3 nanoparticles was investigated by degrading an aqueous solution of methylene blue under LED UV irradiation.