We report the preparation of carbon-coated magnetic iron nanoparticles with diameters mainly around 40-55 nm from iron-filled coal-derived hollow carbon rods by arc discharge. These monodispersed carbon-coated iron nanoparticles were found in the soot-like deposits formed around the cathode. The transmission electron microscopy and X-ray diffraction studies show that these nanoparticles are perfectly coated with graphitic carbon shells with a thickness of 20-30 nm. A simple model is proposed to explain the growth of the carbon-coated metal nanoparticles in terms of the properties of coal-derived carbon and the arcing conditions. (C) 2004 Elsevier B.V. All rights reserved.