Ag@α-Fe₂O₃ nanocomposite having a core–shell structure was synthesized by a two-step reduction-sol gel approach, including Ag nanoparticles synthesis by sodium borohydride as the reducing agent in a first step and the subsequent mixing with a Fe⁺³ sol for α-Fe₂O₃ coating. The synthesized Ag@α-Fe₂O₃ nanocomposite has been characterized by various techniques, such as SEM, TEM and UV-Vis spectroscopy. The electrical and gas sensing properties of the synthesized composite towards low concentrations of ethanol have been evaluated. The Ag@α-Fe₂O₃ nanocomposite showed better sensing characteristics than the pure α-Fe₂O₃. The peculiar hierarchical nano-architecture and the chemical and electronic sensitization effect of Ag nanoparticles in Ag@α-Fe₂O₃ sensors were postulated to play a key role in modulating gas-sensing properties in comparison to pristine α-Fe₂O₃ sensors.