This paper demonstrates fine size-controlled synthesis of superparamagnetic carbon-encapsulated iron nanoparticles, by a supersonic plasma jet assisted rapid, bulk-production process, by manipulation of the pressure in the sample collection chamber. Transmission electron microscopy and small angle x-ray scattering measurements confirmed the formation of single-crystals with a narrow size distribution, having core average size of 5.0 nm and encapsulated by an ultrathin carbon coating, for sub-mbar pressure. VSM and Mossbauer characterization established the nanocrystallites to be superparamagnetic in nature, with saturation magnetization 67 emu/g and coercive field 7.4 Oe. Controlled plasma heating during synthesis led to the burning down of extra carbon that resulted in further enhancement of the magnetization of the product. Graphitization of the encapsulating layers also enhanced, which could successfully protect the metallic core from oxidation, as well as improved its cyto-compatibility. This purified sample could be ideal for targeted drugs delivery and water treatment applications. Another sample was processed through controlled reaction with oxygen, the as-synthesized sample having magnetic properties approaching that of the first sample, which may be more attractive especially for water treatment processes because of the simpler single-step processing of the material.