The mechanochemical reaction of hematite with graphite by mechanical alloying (MA) has been investigated at room temperature. The solid state reduction of hematite to Fe3O4 and FeO has been observed after 120 hours of MA by a planetary ball mill. Saturation magnetization is gradually increased with milling time up to 80 h, and then deceased after 120 h of MA, indicating the transformation of Fe3O4 into nonmagnetic FeO through further reduction. Neither the solid state reduction of Fe2O3 by graphite nor a sizable grain refinement is observed in the MA process using a horizontal ball mill.