MoO2-Fe2O3 nanoparticle system was successfully synthesized by mechanochemical activation of MoO2 and α-Fe2O3 equimolar mixtures for 0-12 hours of ball milling time. The study aims at exploring the formation of magnetic oxide semiconductors at the nanoscale, which is of crucial importance for catalysis, sensing, energy-related and electrochemical applications. X-ray powder diffraction (XRD), Mössbauer spectroscopy and magnetic measurements were used to study the phase evolution of MoO2-Fe2O3 nanoparticle system under the mechanochemical activation process. Rietveld refinement of the XRD patterns yielded the values of the crystallite size and lattice parameters as function of milling times and indicated the presence of Mo-substituted hematite and Fe-doped molybdenum dioxide at long milling times. The Mössbauer studies showed that the spectrum of the mechanochemically activated composites evolved from a sextet for hematite to sextet and a doublet upon duration of the milling process with molybdenum dioxide. Recoilless fraction was determined using our dual absorber method and was found to decrease with increasing ball milling time. Magnetic measurements recorded at 5 and 300 K in an applied magnetic field of 50,000 Oe showed the magnetic properties in the antiferromagnetic and canted ferromagnetic states. The Morin transformation was evidenced by zero-field cooling-field cooling (ZFC-FC) measurements in 200 Oe and the transformation characteristic temperatures were shifted to lower values.