This study describes the synthesis of carbon-encapsulated iron nanoparticles using an ultrasonic method and also investigates their catalytic activity. These nanoparticles have been prepared using ultrasonic irradiation followed by annealing at various temperatures. As the annealing temperature of as-prepared alpha-Fe2O3 nanoparticles increased, the sample transformed into gamma-Fe2O3, Fe3O4, and Fe nanoparticles via the reduction process without requiring any additional reducing agents such as H-2 gas, thus, creating a carbon shell surrounding the nanoparticles. By controlling the experimental conditions, Fe nanoparticles of various sizes can be formed with diameters in the range 100-800 nm; these nanoparticles are tightly encapsulated by 20-nm-thick carbon shells. Because of their high saturation magnetization 212 emu g(-1), the carbon-encapsulated Fe nanoparticles can be used for magnetic resonance imaging with a dramatically enhanced efficiency compared to commercially available T-2 contrast agents. Moreover, the carbon-encapsulated Fe nanoparticles showed its superior catalytic activity and reusability for the hydrogenation of biomass-derived levulinic acid to GVL (99.6 %) in liquid phase.