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Highly dispersed γ-Fe2O3 powders with particle sizes down to 5 nm were directly synthesized by combustion of solutions of iron pentacarbonyl or iron(III) acetylacetonate in toluene in an oxyhydrogen flame. The particle size as well as other properties of the obtained powders can be controlled simply by varying the iron concentration in the starting solutions. Phase composition, morphological and magnetic properties of the powders were studied. The reasons for the formation of γ-Fe2O3 are discussed by means of structure–chemical/kinetic considerations. The materials are interesting as recording materials, or ferrofluids, or for colour imaging and bioprocessing.