This work thoroughly investigates chemical solvent-particles interactions during the formation of composite particles by pulsed laser melting of α-Fe2O3. Two solvents, with different dielectric constants, such as ethyl acetate (εr = 6) and ethanol (εr = 24.6), were examined in terms of their effect on the morphology, size, and phase composition of iron oxide composites. We calculated the laser fluence curves using the heating-melting-evaporation approach to identify the critical particle size that undergoes the phase changes first. We assessed the temperature of the particles irradiated with 390 mJ/pulse.cm2 in both solvents, including the heat dissipation between the particles and the liquid. The phase diagram of the Fe–O–C–H system was calculated to determine the temperature–pressure relationship of the system in equilibrium. We also employed an in situ GC–MS analysis to identify the volatile products during irradiation. Based on our experimental results, we concluded that the final diameter of the composites increases from 400 to 600 nm, along with the decreasing dielectric constant of the solvent, which is related to the different polarization of the organic liquid and the degree of particle agglomeration. The reduction of hematite in ethanol proceeded much faster, ending up with Fe/FeCx, while in ethyl acetate, it ended up with Fe3O4. Among all the particles, those with a diameter of 200 nm have the highest temperature and undergo the phase transition first. The temperature of a 200 nm composite particle in ethanol is slightly lower than in ethyl acetate, i.e. 1870 K as compared to 1902 K. Phase equilibrium diagrams proved the existence of Fe, FeO, and Fe3O4 as the preferred phases at about 1900 K. Our research provides a new insight into the process of submicron particle formation during pulsed laser irradiation and allows proposing a mechanism for the growth of particles of different size and phase composition depending on the solvent.