We present the first synthesis of ultrafine tin oxide nanocrystals (2 to 3 nm) by pulsed laser ablation of a tin metal plate in aqueous solutions of sodium dodecyl sulfate (SDS) and in pure water. The particle size, phase structure, and surface states are characterized by X-ray diffraction (XRD), transmission electron microscopy (TEM), and X-ray photoelectron spectroscopy (XPS). Surfactant effects on the formation of tin oxide nanocrystals are also examined. Stable colloidal suspensions consisting of well-dispersed tin oxide nanocrystals with very narrow size distribution could be obtained with surfactant Solution around the critical micelle concentration, and the formation of metal droplets was significantly suppressed. Optical transmittance spectrum analysis indicated that the optical gap of SnO2-x nanocrystals increased to 3.81 eV with an average size of 2.5 nm due to quantum size effects. XPS investigation revealed that the valence of Sri in oxide nanoparticles surface is not four, but rather around three. A possible formation process of tin oxide is proposed based on laser-induced reactive quenching and surfactant-mediated growth. This unique technique could be extended to prepare other oxide nanocrystals.