Ultrafine Gd2O3:Eu3+ nanocrystals were successfully prepared by a simple reverse microemulsion method and subsequent calcination. Their structural, optical and magnetic properties were investigated using scanning electron microscopy(SEM), transmission electron microscopy(TEM), X-ray diffraction(XRD), Fourier transform infrared(FTIR), photoluminescence(PL), and magnetic property measurement system(MPMS). The amorphous Gd2(CO3)3:Eu3+ colloidal spheres were proved as an intermediate product, and gradually transformed into crystallized Gd2O3:Eu3+ with average diameter less than 100 nm. The paramagnetic property of the synthesized Gd2O3:Eu3+ nanocrystals were confirmed with its linear hysteresis plot(M-H). And Gd2O3:Eu3+ nanocrystals showed high contrast T1-enhancing modality due to the presence of the Gd3+ ions onto the particle surface. In addition, the application of the Gd2O3:Eu3+ nanocrystals as biotag for cell labeling was reported, red fluorescence from Eu3+ ions observed by fluorescence microscopy showed that the nanocrystals could permeate the cell membrane. Cytotoxicity studies of the Gd2O3:Eu3+ nanocrystals showed no adverse effect on cell viability, evidencing their high biological compatibility. Therefore, the nanoprobe formed from Gd2O3:Eu3+ nanocrystals provided the dual modality of optical and magnetic resonance imaging.