Sonochemical decomposition of Fe(CO)5 was carried out in the presence of different surfactants. The reactions give stable colloids of undecenoate, dodecyl sulfonate, and octyl phosphonate coated Fe2O3 nanoparticles of 5−16 nm in diameter. The ionic binding of the surfactants to the nanoparticle surfaces was confirmed by FTIR spectroscopy. Electron paramagnetic resonance measurements, magnetization curves, and zero-field cooled and field cooled studies indicate that the as-prepared amorphous nanoparticles are superparamagnetic. These studies show that the phosphonate-coated nanoparticles behave in a strikingly different manner from the other particles. It is proposed that the extra negative charge on the phosphonate, as compared to the carboxylate and sulfonate groups, makes it a strong bridging bidentate ligand, resulting in the formation of strong ionic bonds to the surface Fe3+ ions, which decreases the number of unpaired spins, possibly through a double superexchange mechanism through a Fe3+−O−P−O−Fe3+...