Silicon carbide (SiC) fibers are prepared using an iron-containing polycarbosilane (Fe-PCS) as the precursor. Iron pentacarbonyl [Fe(CO)5] is first reacted with low-molecular-weight liquid PCS to form an iron-containing colloid. The colloid is then added into high-molecular-weight solid PCS to form Fe-PCS. Formation of the iron-containing colloid as well as the SiC fiber processing has been studied. It is found that during the preparation of the colloid, the iron pentacarbonyl first decomposes under heat into nanosized carbonyl derivatives and CO. CO then reacts with liquid PCS at the interface, rendering liquid PCS cross-linked and hence the particles encapsulated. At a higher temperature, the derivatives further decompose into nanosized iron particles. The iron exists as nanosized α-Fe domains (∼5 nm) and is highly uniformly distributed inside the ceramic fibers. Ceramic fibers containing 3.64 wt% iron have a good combination of tensile strength (2.37 GPa), electrical resistivity (0.46 Ω·m) and magnetic properties (a saturation magnetization of 1.48 A·m2/kg and a coercivity of 5094 A/m).