We investigate the magnetic and magneto-optic properties of epitaxial GaN:Gd layers as a function of the external magnetic field and temperature. An unprecedented magnetic moment is observed in this diluted magnetic semiconductor. The average value of the moment per Gd atom is found to be as high as 4000 mub as compared to its atomic moment of 8 mub. The long-range spin-polarization of the GaN matrix by Gd is also reflected in the circular polarization of magneto-photoluminescence measurements. Moreover, the materials system is found to be ferromagnetic above room temperature in the entire concentration range under investigation (7$times10^{15}$ to 2$times10^{19}$ cm$^{-3}$). We propose a phenomenological model to understand the macroscopic magnetic behavior of the system. Our study reveals a close connection between the observed ferromagnetism and the colossal magnetic moment of Gd.
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