The nonlinear optical properties of Fe2O3 nanoparticles coated with a layer of organic molecules(DBS) in toluene and bare nanoparticles in hydrosol have been studied in the transparency region by Z scan technique.The key parameters such as nonlinear refractive index γ,two-photon absorption coefficient β and the variation of refractive index per unit photoexcited carrier density σr as well as free-carrier absorption cross section σab were determined.The influences of free-carrier effects on optical nonlinearities of Fe2O3 nanoparticles were discussed.