Nanoscale CeO2 (nanoceria) is a prototypical system that presents d(0) ferromagnetism. Using a combination of x-ray absorption spectroscopy, x-ray magnetic circular dichroism, and modeling, we show that the nanostructure, defects and disorder, and nonstoichiometry create magnetically polarized Ce 4f and O 2p hybridized states captured by the vacancy orbitals (V-orb) that are vital to ferromagnetism. Further, we demonstrate that foreign ions (Fe and Co) enhance the moment at Ce 4f sites while the number of V-orb is unchanged, pointing clearly to the mechanism of orbital hybridization being the key missing ingredient to understanding the unexpected ferromagnetism in many nanoscale dilute magnetic oxides and semiconductors.