The purpose of the present investigation is to develop highly water dispersible and biocompatible La_0.7Sr_0.3MnO₃(LSMO) magnetic nanoparticles (MNPs), which can be used as an effective heating source for the hyperthermal treatment of cancer. LSMO MNPs are synthesized by a novel combustion technique and functionalized with oleic acid (OA). The phase transfer of OA-functionalized LSMO MNPs from non-polar to polar solvents is achieved by further interaction with betaine HCl (with mean particle size ~25 nm). Magnetic measurements of both coated and uncoated particles revealed their  superparamagnetic nature at room temperature. The OA–betaine coated LSMO particles form a stable suspension in aqueous and physiological media, and possess a narrow hydrodynamic size distribution. Magnetic fluid hyperthermia studies clearly show the higher heating efficacy (specific absorption rate) of OA–betaine functionalized LSMO compared with bare LSMO. In addition, these functionalized LSMO nanoparticles are biocompatible with cell lines (HeLa and L929) and do not have toxic effects for further in vivo use. Specifically, the developed nanoparticles show better colloidal stability, high magnetization, excellent self-heating capacity under an external AC magnetic field and biocompatibility on L929 and HeLa cell lines.