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Local structure of Ge nanocrystals embedded in SiO2 has been studied by X-ray absorption fine structure on the Ge K-edge. The XANES and EXAFS results indicate that Ge atoms in samples with the Ge concentration x=25-40 mol. % are coordinated with oxygen atoms, while they exist as amorphous Ge clusters in samples with x=60 mol. %. Upon annealing, completely relaxed crystalline Ge phase is formed for samples with x=60 mol. %, in contrast to the x=25-40 mol. % sample, which show little or no indication of Ge cluster formation. A possible mechanism of Ge nanocluster formation is discussed.