The aim of this study is to fabricate a hybrid composite of iron (Fe) core–carbon (C) shell nanoparticles with enhanced magnetic properties for contrast enhancement in magnetic resonance imaging (MRI). These new classes of magnetic core–shell nanoparticles are synthesized using a one-step top–down approach through the electric plasma discharge generated in the cavitation field in organic solvents by an ultrasonic horn. Transmission electron microscopy (TEM) observations revealed the core–shell nanoparticles with 10–85 nm in diameter with excellent dispersibility in water without any agglomeration. TEM showed the structural confirmation of Fe nanoparticles with body centered cubic (bcc) crystal structure. Magnetic multi-functional hybrid composites of Fe core–C shell nanoparticles were then evaluated as negative MRI contrast agents, displaying remarkably high transverse relaxivity (r2) of 70 mM−1·S−1 at 7 T. This simple one-step synthesis procedure is highly versatile and produces desired nanoparticles with high efficacy as MRI contrast agents and potential utility in other biomedical applications.