This work illustrates a simple and cost effective methodology to develop nanoparticles of alpha-Fe2O3 embedded in layered rGO sheets which are found to be a potential material for the sensitive detection of CO gas at room temperature for the first time. The nanocomposite rGO-alpha-Fe2O3 shows improved CO gas sensing characteristics in comparison with pure alpha-Fe2O3. rGO sheets provide enhanced sensitivity through their extra-ordinarily high surface area (19.047 m(2)/gm rGO-alpha-Fe2O3), low response (21 s at 10 ppm) as well as recovery times (8 s at 10 ppm) etc. The material also shows p-type semiconducting behaviour at room temperature and has a high selectivity towards CO gas only. This work indicates a possibility of using this reduced graphene oxide based room temperature p-type semiconductor for sensing of other similar gases as well.