Highly crystalline, uniform Fe nanoparticles were successfully synthesized and encapsulated in zirconia shell using sol-gel process. Two different approaches have been employed for the coating of Fe nanoparticle with zirconia. The thickness of zirconia shell can be readily controlled by altering molar ratio of Fe nanoparticle core to zirconia precursor in the first case where as reaction time was found to be most effective parameter to controlled the shell thickness in the second method. The structure and magnetic properties of the ZrO2-coated Fe nanoparticles were studied. TEM and HRTEM images show a typical core/shell structure in which spherical α-iron crystal sized of ~25 nm is surrounded by amorphous ZrO2 coating layer. TGA study showed an evidence of weight loss of less than 2% over the temperature range of 50-500 °C. The nanoparticles are basically in ferromagnetic state and their magnetic properties depend strongly on annealing temperature. The thermal treatment carried out in as-prepared sample resulted in reduction of coercivity and an increase in saturation magnetization. X-ray diffraction experiments on the samples after annealing at 400-600 °C indicate that the size of the Fe@ZrO2 particles is increased slightly with increasing annealing temperature, indicating the ZrO2 coating layer is effective to interrupt growing of iron particle according to heat treatment.