Gelatin-carbonyl iron composite particle was prepared by micro emulsion method. The analysis of scanning electron microscope(SEM) shows that the ultrafine particles are spheroids coated by gelatin, and the average sizes of particles are 3-10 μm. The specific saturation magnetization σs is 130.9 A·m2/kg, coercivity Hc is 0.823 A/m, and residual magnetism r is 4.98 Am2/kg for the composite particles. It is shown that the particles possess properties of soft magnetic. The yield stress of magnetorheological fluid(MRF) with composite particle reaches 70 kPa at 0.5 T magnetic induction. Magnetorheological effects are superior in lower magnetic field intensity and the subsidence stability of the MRF is excellent compared with pure carbonyl iron powder.