The rheological properties and dispersion stability of magnetorheological (MR) fluids consisting of hydrophilic treated carbonyl iron particles dispersed in a water-in-oil emulsion were studied for the first time by the use of a stress-controlled rheometer and sedimentation test. In order to improve the stability of the MR fluids, carbonyl iron magnetic particles were chemisorbed by Tween 80 and a water-in-oil emulsion was employed as a continuous phase for MR fluids. Attraction between hydrophilic-treated carbonyl iron and water emulsion in continuous phase plays a critical role in greatly improving stability of dense carbonyl iron particles against sedimentation without restricting rheological properties. On application of magnetic fields, the suspensions show a striking increase in viscosity. Since constant stress is generated within the limit of zero shear rate, the plateau in the flow curve corresponds to the Bingham yield stress. Under a low external magnetic field, the yield stress varied as B(3/2), indicating that local magnetization saturation occurs between the neighboring magnetized particles. The yield stress has an approximately linear relation to the particle volume fraction. Copyright 2001 Academic Press.