Magnetite nanoparticles have been prepared by one-pot thermal decomposition process using iron (III) acetylacetonate in stearic acid in ambient environment. In this process, stearic acid acts as solvent as well as capping agent for the particles. These as-prepared hydrophobic magnetite nanoparticles have been converted into a hydrophilic form using tetramethylammonium hydroxide. This controlled surface functionalization approach limits microstructural and phase alteration due to the ligand exchange. A detailed investigation was carried out on the microstructural characteristics of these nanoparticles with the aid of X-ray diffraction, infrared spectroscopy, XPS and transmission electron microscopy. The hydrophilic superparamagnetic magnetite particles posses extraordinary transverse relaxivity and contrast property, making them potential T₂ contrast agent in clinical magnetic resonance imaging.