Monoclinic Gd2O3:Eu(3+) nanoparticles (NPs) possess favorable magnetic and optical properties for biomedical application. However, how to obtain small enough NPs still remains a challenge. Here we combined the standard solid-state reaction with the laser ablation in liquids (LAL) technique to fabricate sub-10 nm monoclinic Gd2O3:Eu(3+) NPs and explained their formation mechanism. The obtained Gd2O3:Eu(3+) NPs exhibit bright red fluorescence emission and can be successfully used as fluorescence probe for cells imaging. In vitro and in vivo magnetic resonance imaging (MRI) studies show that the product can also serve as MRI good contrast agent. Then, we systematically investigated the nanotoxicity including cell viability, apoptosis in vitro, as well as the immunotoxicity and pharmacokinetics assays in vivo. This investigation provides a platform for the fabrication of ultrafine monoclinic Gd2O3:Eu(3+) NPs and evaluation of their efficiency and safety in preclinical application.