A modified sol-gel method was introduced for the synthesis of Fe₂O₃ nanoparticles. Different sizes (22-56 nm) of pure alpha phase (hematite) as well as an admixture of alpha (hematite) and gamma (maghemite) phases were obtained. The X-ray diffraction, Mössbauer spectroscopy and VSM magnetic measurements were carried out to verify and calculate the relative percentage of phases present in the samples. Two major size and phase controlling parameters have been identified. First, the annealing temperature affects the relative fractions of the two phases and consequently the magnetization of the particles. As annealing temperature increases; the average size of particle decreases and the coercivity of particles increases. Second, controlling parameter is molarity of the ligand agent which has been proved as inversely proportional to the size of the nanoparticles.