Encapsulation of magnetite (IOPs) in gelatin nanoparticles has been carried out by in situ precipitation of the particles in presence of gelatin, followed by desolvation and cross-linking of the composite nanoparticles. The aim of the study was to investigate the effect of various formulation parameters (viz; desolvating agent, cross-linking agent and percentage of IOPs) on the hydrodynamic size of the gelatin-coated magnetic iron oxide composite nanoparticles (GIOPs) and stability of the colloidal dispersion. Extensive characterization by dynamic light scattering, thermogravimetric analysis, X-ray diffraction, infrared spectroscopy, transmission electron microscopy and atomic force microscopy shows complete encapsulation of IOPs of size below 8 nm into gelatin nanoparticles of varying size. Size as well as stability of the colloidal dispersion of the GIOPs was found to be dependent on the investigated parameters. Furthermore, the nanoparticle dispersion was found to be stable in pH ranges from 2-12. Thus, obtained composite nanoparticles could hold promise as a carrier system in biomedical applications.