Synthesis of iron nanoparticles with a substantially unoxidized iron core and a biocompatible coating is described. The nanoparticles are formed by reacting an iron salt solution with a reducing agent in a substantially oxygen-free environment and exposing the formed iron particles to a biocompatible coating agent in a substantially oxygen-free environment to form coated iron particles. An average diameter of the coated iron particles is between 5 nm and 25 nm. The biocompatible coating can functionalized with cell-specific agents for use as diagnostic and therapeutic agents.