The ultrafine iron hydroxide/oxide systems are fabricated by a hydrothermal approach, using iron nitrate and citric acid as precursors. The phase composition, crystal and magnetic microstructures, morphology, conductivity, and optical properties are characterized by X-ray diffraction, scanning electron microscope, impedance spectroscopy, Mossbauer spectroscopy, and UV-VIS spectroscopy. The mechanisms of phase transformation of amorphous ultrafine gamma-FeOOH -> nanocomposite gamma-Fe2O3/alpha-Fe2O3 in the temperature interval 150-350(o)C are established. The photocatalytic activity of samples was estimated by the degradation of methylene blue and formaldehyde under UV or visible light in an aqueous solution. The results indicate that the photocatalytic degradation activities of amorphous gamma-FeOOH and nanocomposite gamma-Fe2O3/alpha-Fe2O3 are higher than that of phase pure gamma-Fe2O3. The photocatalytic property of samples is related to their conductivity and band gap. This implies that a synergistic effect exists between the conductivity and the photocatalytic activity in the ultrafine iron hydroxide/oxide systems. In addition, it can be attributed to the active heterogeneous Fenton process for gamma -FeOOH and the microstructure of gamma-Fe2O3/alpha-Fe2O3, which is probably caused by a successful combination of electronic structures of the phases of magnetite and hematite.