Synthesis of composite powders for the Fe2O3-Zn system by mechanical alloying (MA) has been investigated at room temperature. Optimal milling and heat treatment conditions to obtain soft magnetic composite with fine microstructure were investigated by X-ray diffraction, differential scanning calorimetry (DSC) and vibrating sample magnetometer (VSM) measurement. It is found that α-Fe/ZnO composite powders in which ZnO is dispersed in α-Fe matrix can be obtained by MA of Fe2O3 with Zn for 4 hours. The change in magnetization and coercivity also reflects the details of the solid-state reduction process of hematite by pure metal of Zn during MA. Densification of the MA powders was performed in a spark plasma sintering (SPS) machine at 900 ~ 1,000 ℃ under 60 MPa. Shrinkage change after SPS of sample MA'ed for 5 hrs was significant above 300 ℃ and gradually increased with increasing temperature up to 800 ℃. X-ray diffraction results show that the average grain size of α-Fe in the α-Fe/ZnO composite sintered at 900 ℃ is in the range of 110 nm.