$alpha$-$Fe_2O_3$ fine powders with the sizes smaller than 0.5 $mu extrm{m}$ were prepared by the solvolysis and condensation reaction using iron(III) nitrate and ethanol as starting materials. The variation of pH and the change of FT-IR absorption peak were observed to study the reaction mechanism of iron(III) nitrate solution. In addition, the decomposition mechanism of the precipitated gel was investigated by differential scanning calorimeter, X-ray diffractometer and FT-IR spectrometer. Scanning electron microscope and BET method were performed to analyze the effects of Iron (III) nitrate concentration and reaction temperature on the particle size of $alpha$-$Fe_2O_3$ powders.