Fe–ZrO₂ ferromagnetic nanocomposite thin films are successfully synthesized using a thermite reaction between the Zr and Fe₂O₃ layers. The initial Zr/Fe₂O₃ bilayers were obtained by the deposition of Zr layers on α-Fe₂O₃ films at room temperature. The mixing at the Zr/Fe₂O₃ interface and synthesis of α-Fe and the amorphous ZrO₂ phases start at a temperature above the initiation temperature T_in ∼ 250 °C. Together with the formation of α-Fe, partial transformation from Fe₂O₃ to Fe₃O₄ occurs after annealing at 300 °C. The secondary reaction between Fe₃O₄ and Zr starts soon after the Fe₂O₃ is converted to the Fe₃O₄ phase. The crystallization of amorphous ZrO₂ and the formation of the ZrO₂ cubic/tetragonal phase occurs above 400 °C. After annealing at 500 °C the reaction products contain (1 1 0) textured α-Fe nanocrystals with a diameter of about 34 nm embedded in an insulating c-ZrO₂ (or t-ZrO₂) matrix. The synthesized Fe–ZrO₂ nanocomposite films possess soft magnetic behavior, high magnetization and good chemical stability.