Atomic structures and physical properties of Gd-doped alumina clusters-namely, GdAl 2n-1O 3n and Gd 2Al 2n-2O 3n with n = 1-10-have been studied within the framework of spin-polarized density functional theory and the projector augmented wave pseudopotential method. We find that the atomic structures of the host clusters (Al 2O 3) n are not changed significantly by the substitutional doping of a Gd atom on Al sites. Our results show that in the size range of the clusters we studied, a Gd atom prefers a maximum 4-fold-coordinated Al-site, except for n = 8, in which a 5-fold-coordinated Al site is favored. The substitution of Al with Gd atom is energetically favorable. This is in contrast to the substitutional doping of Gd in the bulk alumina corundum structure that is endothermic. There is a net magnetic moment of 7 $\mu$ B per Gd atom, which is mostly localized on the Gd atom. Further substitution of an Al atom with Gd in GdAl 2n-1O 3n clusters results in the lowest-energy configuration's being either ferromagnetic or antiferromagnetic, the difference between the two magnetic states being very small. The variation in the magnetic state is found to be associated with the variation in the coordination number of Gd atoms and the sites of the two Gd atoms. Our results suggest that Gd doping of nanoparticles offers an interesting way to prepare Gd-doped ceramic materials. {\textcopyright} 2012 American Chemical Society.