Alumina-iron nanocomposite powders were prepared by a two-step process. In the first step, α-Al2O3-FeCl2 powder mixture was formed by mixing α-Al2O3 powders with FeCl2 solution followed by drying. In the second step, the FeCl2 in the dry power mixture was selectively reduced to iron particles. A reduction temperature of 750℃ for 15 min in dry H2 was chosen based on the thermodynamic calculations. The concentration of iron in FeCl2 solution was calculated to be 20 vol. pct in the final composite. Two techniques were used to produce composite bulk materials. The Al2O3 nanocomposite powders were divided to two batches. The first batch of the produced mixture was hot pressed at 1400℃ and 27 MPa for 30 min in a graphite die. To study the effect of oxygen on the Al2O3/Fe interface bonding and mechanical properties of the composite,the second batch was heat treated in air at 700℃ for 20 min to partially oxidize the iron particles before hot pressing. Characterization of the composites was undertaken by conventional density measurements, X-ray diffractometry (XRD), scanning electron microscopy (SEM), transmission electron microscopy (TEM) and electron probe micro analysis (EPMA). The suggested processing route (mixing, reduction and hot pressing)produces ceramic-metal nanocomposite much tougher than the pure Al2O3. The fracture strength of the produced Al2O3/Fe nanocomposite is nearly twice that of the pure Al2O3. The presence of spinel phase,FeAl2O4, as thick layer around the Fe particles in the Al2O3 matrix has a detrimental effect on interfacial bonding between Fe and Al2O3 and the fracture properties of the composite.