Lithium intercalation hosts are a key point to the energy density of the largely used LiCoO2 (even if of high cost and toxicity) as well as of manganese oxides which have been investigated most extensively. Iron oxides are attractive electrode materials for low-voltage rechargeable lithium batteries from both cost and environmental standpoints. However, search for iron oxides of conventional crystalline structures and micrometer particle sizes as lithium intercalation cathodes, has been greeted with disappointing results. Here we report on the synthesis, characterizations, electrochemical study and electrochemical impedance spectroscopy (EIS) of a nanocrystalline γ-Fe2O3 that simultaneously exhibits high lithium insertion capacity and good capacity retention upon cycling. These properties reveal thermodynamics of the nanocrystalline material inherently different from those of its microcrystalline counterpart. Moreover, EIS showed that the intercalation process of the lithium ion occurs according to two processes involving first the reduction of the surface Fe3+ with concomitant charge neutralization by Li+ ions onto the surface defects of the nanoparticle followed by the reduction of the core Fe3+ with insertion of the Li+ deeper in the particle.