The atomic structures of nanocrystalline powders of ceria, CeO2, and ceria-zirconia solid solution, (Ce,Zr)O-2, were studied by the pulsed neutron diffraction technique. Ceria is used as an oxygen storage component in automotive exhaust emission control systems, but the degradation of its oxygen storage capacity (OSC) after extended use at high temperatures has been a problem. Our results for the first time establish a direct correlation between the concentration of vacancy-interstitial oxygen defects and OSC. The surface area, on the other hand, exhibits much less correlation with OSC. The results also show that zirconia, which is known to retard the degradation when incorporated into ceria, reduces ceria and preserves oxygen defects. It is suggested that oxygen defects are the source of OSC in ceria-based catalyst supports, and the preservation of oxygen defects is critical for the stability of OSC against thermal aging.