A simple and useful method to synthesize water-soluble chitosan is proposed. Water-soluble chitosan-gpoly(ethylene oxide) could be synthesized readily by modification of authentic chitosan with a 150,000 g/mol molecular weight using ω-anhydride-functionalized poly(ethylene oxide)s (PEOs) with or without small molecular anhydride compounds, such as phthalic anhydride or acetic anhydride through a ‘grafting onto’ method. The PEOgrafting method in the presence of acetic anhydride leading to partial acetylation appears to be more effective in synthesizing relatively high water-soluble chitosan. The bactericidal properties of PEO-modified chitosan and small molecular anhydride over a moderate concentration range (over 500 μg/mL) suggest that they might be used in the biomedical field. The PEO-grafted chitosans were used successfully as polymeric stabilizers to prepare nano-sized iron oxide particles as a magnetic resonance imaging contrast agent for tumor cells. The size of the iron oxide nanoparticles stabilized by modified chitosans was controlled in the range of 5 to 30 nm with superparamagnetic properties in aqueous media. All the materials were characterized by 1H NMR, UV/Visible spectroscopy, TEM, magnetization, and XRD pattern analyses.