To achieve better chemical affinity between conducting polyaniline (PANI) and soft magnetic carbonyl iron (CI) microspheres, we initially attached hydroxyl groups to the surface of CI using p-toluenesulfonic acid monohydrate. The PANI-coated CI composite particles were then fabricated via a chemical oxidation polymerization method. Both the aniline monomer and anilinium cation tended to surround the activated surface of the CI microspheres due to hydrogen bonding and electrostatic interactions, providing a better core-shell shape of the CI/PANI particles. Crystallinity of the product particles and bonding between CI and PANI were measured by Xray diffraction and FT-IR spectroscopy, respectively, while the shell morphology and thermal stability were measured by scanning electron microscope and thermogravimetric analysis, respectively, confirming the successful coating performance. Viscoelastic behaviors of the MR fluid prepared by suspending the magnetic particles in medium oil were measured via a rotation rheometer under an induced magnetic field. It also exhibited a typical MR flow behavior, which was analyzed using various rheological models. Its sedimentation was detected using a Turbiscan, showing a 60% and 11% improved dispersion stability at 200 min and 900 min, respectively, compared to the pure CI particles by decreasing the density mismatch between composite particle and silicone oil.