The size distribution and magnetic properties of ultra-small gadolinium oxide crystals (US-Gd 2 O 3 ) were studied, and the impact of polyethylene glycol capping on the relaxivity constants (r 1 , r 2 ) and signal intensity with this contrast agent was investigated. Size distribution and magnetic properties of US-Gd 2 O 3 nanocrystals were measured with a TEM and PPMS magnetometer. For relaxation studies, diethylene glycol (DEG)-capped US-Gd 2 O 3 nanocrystals were reacted with PEG-silane (MW 5000). Suspensions were adequately dialyzed in water to eliminate traces of Gd 3+ and surfactants. The particle hydrodynamic radius was measured with dynamic light scattering (DLS) and the proton relaxation times were measured with a 1.5 T MRI scanner. Parallel studies were performed with DEG-Gd 2 O 3 and PEG-silane-SPGO (Gd 2 O 3 , < 40 nm diameter). The small and narrow size distribution of US-Gd 2 O 3 was confirmed with TEM (∼3nm)andDLS.PEG-silane-US-Gd 2 O 3 relaxation parameters were twice as high as for Gd-DTPA and the r 2 /r 1 ratio was 1.4. PEG-silane-SPGO gave low r 1 relaxivities and high r 2 /r 1 ratios, less compatible with positive contrast agent requirements. Higher r 1 were obtained with PEG-silane in comparison to DEG-Gd 2 O 3 . Treatment of DEG-US-Gd 2 O 3 with PEG-silane provides enhanced relaxivity while preventing aggregation of the oxide cores. This study confirms that PEG-covered Gd 2 O 3 nanoparticles can be used for positively contrasted MR applications requiring stability, biocompatible coatings and nanocrystal functionalization.