We report a comprehensive study on the structure and magnetic properties of ultrafine Ni nanoparticles prepared by the borohydride reduction method. A spontaneous surface oxide layer of NiO encapsulates the Ni particles, as these have been prepared under ambient atmosphere. From the x-ray diffraction (XRD) pattern, the "as-prepared" sample has been identified as Ni in a tetragonal crystal structure, stabilized by the incorporation of oxygen atoms in the Ni lattice. On annealing this sample in air at different temperatures, the XRD patterns showed an interesting feature: unexpected fcc Ni peaks appeared together with the usual NiO peaks. Anomalous behavior is also observed in the M-H curves, with the as-prepared sample showing a linear response with field and low values of magnetization and the annealed samples showing ferromagnetism with large coercivity (290 Oe) and high magnetization values. These surprising and seemingly contradictory observations have been coherently explained on the basis of a proposed phenomenological model. Furthermore, we attribute the observed low magnetization values of the as-prepared sample to an antiferromagnetic superexchange interaction between some of the Ni atoms, mediated by the dissolved oxygen atoms in the Ni lattice. © 2005 The American Physical Society.