Mullite-based nanocomposite powders with embedded iron nanoparticles were synthesized by reduction of sol-gel prepared Al5.4Feo.6Si20i3 solid solution in hydrogen. Structural characterization studied by TEM revealed that the intra-granular iron nanoparticles along with inter-type iron grains were obtained in mullite matrix. The magnetic properties of nanocomposite powders after reduction at 1200°C were measured by superconducting quantum interference device (SQUID). It suggests that the intergranular and intragranular a-iron nanoparticles had the ferromagnetic and superparamagnetic behavior at room temperature, respectively. Dense Mullite-based iron composites were prepared from the nanocomposite powders reduced at different temperatures by hot pressing. The mechanical and magnetic properties were strongly affected by the reduction temperature. Flexural strength of mullite based iron nanocomposite reduced at 1200°C and successively hot pressed at 1650°C is one times higher than monothetic mullite. Furthermore, dense composites also behave ferromagnetic property at room temperature.