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In recent years, paramagnetic nanoparticles (NPs) have been widely used for magnetic resonance imaging (MRI). This paper reports the fabrication and toxicity evaluation of polyethylene glycol (PEG)-functionalized holmium oxide (Ho2O3) NPs for potential T2-weighted MRI applications. Various characterization techniques were used to examine the morphology, structure and chemical properties of the prepared PEG–Ho2O3 NPs. MRI relaxivity measurements revealed that PEG–Ho2O3 NPs could generate a strong negative contrast in T2-weighted MRI. The pilot cytotoxicity experiments showed that the prepared PEG–Ho2O3 NPs are biocompatible at concentrations less than 16 μg/mL. Overall, the prepared PEG–Ho2O3 NPs have potential applications for T2-weighted MRI imaging.