The effect of an external magnetic field $(0–1\mathrm{T})$ on the upconversion emission $({\lambda }_{\mathrm{exc}}=976\mathrm{nm})$ of ${\mathrm{Gd}}_2{\mathrm{O}}_3:{\mathrm{Er}}^{3+}∕{\mathrm{Yb}}^{3+}$ nanocrystalline phosphor has been studied. Optical bistability (hysteresis behavior in the intensity of the optical emission) for different transitions of the ${\mathrm{Er}}^{3+}$ ion has been observed for a complete cycle of the magnetic field between 0 and $1\mathrm{T}$ . The phosphor shows paramagnetic behavior, consistent with the presence of ${\mathrm{Gd}}^{3+}$ ions, at room temperature. Interaction between induced magnetization in the ${\mathrm{Gd}}_2{\mathrm{O}}_3$ host and the intrinsic magnetic moment of the nanosized clusters of ${\mathrm{Er}}^{3+}$ and ${\mathrm{Yb}}^{3+}$ ion pairs is proposed to be responsible for the hysteresis behavior.