Novel isolated magnetic single-domain&ggr;-Fe2O3nanoclusters have been prepared by coprecipitation of ferrous and ferric salts encapsulated within sol-gel derived silica(SiO2).The nonmagneticSiO2coating formed by hydrolysis and polycondensation of tetraethoxysilane on the surface of theFe2O3nanoclusters provides a means for thermally stable dispersion ofFe2O3clusters. The precipitated particles coated withSiO2are spherical with 4–5 nm diameters. Surface and strain effects played a critical role in determining the overall magnetic behavior of the spherical single-domain particles. Superparamagnetic behavior was observed by superconducting quantum interference device magnetometry and Mo¨ssbauer spectroscopy. Superparamagnetic barrier energies and the low-temperature coercivities were modified through cluster/support interface microstructure manipulation. The optical studies showed the absorption edge of the nanocomposites to be slightly blue shifted in the UV–VIS spectrum range when compared to that of bulk&ggr;-Fe2O3.This was attributed to the combined effects of the quantum confinement of the nanocrystalline&ggr;-Fe2O3clusters and the stress present at the particle/support interface. The magnetic properties can be manipulated via the matrix microstructure, synthesis conditions and thermal treatment. ©1997 American Institute of Physics.