In this paper, Fe₃O₄ and chitosan (CS)-coated Fe₃O₄ nanoparticles were synthesized via co-precipitation method and subsequent covalent binding of CS onto the surface for functionalization, respectively. Characterization of the crystal structures and morphologies of as-synthesized nanoparticles by X-ray diffraction, scanning electron microscopy, and transmission electron microscopy demonstrated that Fe₃O₄ had a cubic spinal structure with irregular shapes and average diameters of 10–20nm. The surface states and magnetic properties of Fe₃O₄-CS nanoparticles were characterized by Fourier transform infrared spectra and vibrating sample magnetometry. Results showed that Fe₃O₄-CS nanoparticles possessed super-paramagnetic properties, with saturated magnetization up to 60emu/g. In addition, Fe₃O₄ and CS-coated Fe₃O₄ nanoparticles were used in the fabrication of α-Fe₂O₃ based gas sensors. Gas sensing measurements revealed that the α-Fe₂O₃ gas sensor prepared from Fe₃O₄-CS had a better response to H₂, CO, C₂H₅OH, and NH₃ compared with the device prepared from pristine Fe₃O₄. Furthermore, the α-Fe₂O₃ sensor prepared from Fe₃O₄-CS nanoparticles exhibited the highest response to CO among the test gases, suggesting that it has great potential for practical applications in environmental monitoring.