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In this work, room temperature ferromagnetism was found in (Zn1-x, Mgx)O film with certain Mg compositions (0.06 < x < 0.50). Below the threshold composition (x < 0.06), the film shows no room temperature ferromagnetism (RTFM) and almost no ZnO nanocrystals (NCs) were found in the film. RTF starts to appear in the (Zn0.94, Mg0.06)O film, and it becomes maximum in (Zn1-x, Mgx)O film with x = 0.20. By detailed analysis of microstructure of the film using high resolution transmission electron microscopy (HRTEM), we found that ZnO NCs were embedded in the ZnO-MgO amorphous phase. Photoluminescence (PL) results show that defects concentrations are quite high in the film. With further increment of Mg composition (x > 0.50), ferromagnetism disappears and the film becomes fully amorphous. Besides, the defects concentration of the film is significantly reduced. The mechanism of RTFM in ZnO-MgO system may be attributed to the interaction ZnO NCs and defects surrounding them.