Nano-colloids and nano-crystals doped with ions of rare-earth elements have recently attracted a lot of attention in the scientific community due to their potential applications as biomarkers, fluorescent inks, gain media for lasers and optical amplifiers. Many rare-earth doped materials of different compositions, shapes and size distribution have been prepared by different synthetic methods, such as chemical vapor deposition, sol-gel process, micro-emulsion techniques, gas phase condensation methods, hydrothermal methods and laser ablation. In this paper micro-crystalline powder of the rare-earthdoped compound NaYF4:Yb3+, Er3+ was synthesized using a simple wet process followed by baking in open air. Under 980 nm diode laser excitation strong fluorescence in the 100 nm band around 1531-nm peak was observed from the synthesized micro-powder. The micro-powder was pulverized using a ball mill and prepared in the form of nano-colloids in different liquids. The particle size of the obtained nano-colloids was measured using an atomic force microscope and a dynamic light scatterometer. The size of the nano-particles was close to 100-nm. The nano-colloids were utilized as a filling media in capillary optical amplifiers and lasers. The gain of a 7-cm-long capillary optical amplifier (150-micron inner diameter) was as high as 6 dB at 200 mW pump power. The synthesized nano-colloids and the active optical components using them can be potentially used in optical communication, signal processing, optical computing, and other applications.