We report a novel chemical vapor deposition (CVD) based strategy to synthesize carbon-coated Fe2O3 nanoparticles dispersed on graphene sheets (Fe2O3@C@G). Graphene sheets with high surface area and aspect ratio are chosen as space restrictor to prevent the sintering and aggregation of nanoparticles during high temperature treatments (800 °C). In the resulting nanocomposite, each individual Fe2O3 nanoparticle (5 to 20 nm in diameter) is uniformly coated with a continuous and thin (two to five layers) graphitic carbon shell. Further, the core-shell nanoparticles are evenly distributed on graphene sheets. When used as anode materials for lithium ion batteries, the conductive-additive-free Fe2O3@C@G electrode shows outstanding Li+ storage properties with large reversible specific capacity (864 mAh/g after 100 cycles), excellent cyclic stability (120% retention after 100 cycles at 100 mA/g), high Coulombic efficiency (∼99%), and good rate capability.