Fabrication of soft magnetic composite powders for the Fe2O3-Ca system by mechanical alloying(MA) has been investigated at room temperature. It is found that soft magnetic composite powders in which CaO is dispersed in α-Fe matrix are obtained by MA of Fe2O3 with Ca for 5 hours. Changes in magnetization and coercivity also reflect the details of the solidstate reduction process of hematite by pure metal of Ca during MA. The saturation magnetization of MA powders increases with increasing MA time and reaches a maximum value of 65 emu/g after 7 hours of MA. The average grain size of α-Fe in MA powders, estimated by diffraction line-width, gradually decreases with increasing MA time and reaches 52 nm after 5 hours of MA. It can also be seen that the coercivity of the 5-hour MA sample is fairly high at 190 Oe, suggesting that the grain refinement of already-produced α-Fe tends to clearly occur during MA.