In the present study, bifunctional silica-coated Y2O3:Eu3+,Co2+ spherical-shaped submicron composite particles were successfully prepared using a facile urea-assisted homogenous precipitation method. Synthesized Y2O3:Eu3+,Co2+ phosphor composites showed both ferromagnetic behaviour and strong visible red luminescence emission. The surface of the Y2O3:Eu3+,Co2+ phosphor composites was modified with a thin silica layer to enhance the luminescent properties and obtain higher biocompatibility of the samples. The composite particles with silica coatings resulted in a small decrease in the viability of L-929 fibroblastic cells at concentrations lower than 25 ppm and allowed cell imaging via internalization and wide distribution into the cells. Overall, these synthesized novel SiO2@Y2O3:Eu3+,Co2+ core-shell phosphor composites with both magnetic and luminescent properties have potential biomedical applications, including bioimaging and diagnosis, and can be also potentially used as MRI contrast agents.