Magnetic liposome-mediated combined chemotherapy and hyperthermia is gaining importance as an effective therapeutic modality for cancer. However, control and maintenance of optimum hyperthermia are major challenges in clinical settings due to the overheating of tissues. To overcome this problem, we developed a novel magnetic liposomes formulation co-entrapping a dextran coated biphasic suspension of LaSrMnO (LSMO) and iron oxide (FeO) nanoparticles for self-controlled hyperthermia and chemotherapy. However, the general apprehension about biocompatibility and safety of the newly developed formulation needs to be addressed. In this work, in vitro and in vivo biocompatibility and therapeutic evaluation studies of the novel magnetic liposomes are reported. Biocompatibility study of the magnetic liposomes formulation was carried out to evaluate the signs of preliminary systemic toxicity, if any, following intravenous administration of the magnetic liposomes in Swiss mice. Therapeutic efficacy of the magnetic liposomes formulation was evaluated in the fibrosarcoma tumour bearing mouse model. Fibrosarcoma tumour-bearing mice were subjected to hyperthermia following intratumoral injection of single or double doses of the magnetic liposomes with or without chemotherapeutic drug paclitaxel. Hyperthermia (three spurts, each at 3 days interval) with drug loaded magnetic liposomes following single dose administration reduced the growth of tumours by 2.5 fold (mean tumour volume 2356 ± 550 mm) whereas the double dose treatment reduced the tumour growth by 3.6 fold (mean tumour volume 1045 ± 440 mm) compared to their corresponding control (mean tumour volume 3782 ± 515 mm). At the end of the tumour efficacy studies, the presence of MNPs was studied in the remnant tumour tissues and vital organs of the mice. No significant leaching or drainage of the magnetic liposomes during the study was observed from the tumour site to the other vital organs of the body, suggesting again the potential of the novel magnetic liposomes formulation for possibility of developing as an effective modality for treatment of drug resistant or physiologically vulnerable cancer.