Engineered superparamagnetic iron oxide nanoparticles (SPIONs) have been studied extensively for their localized homogeneous heat generation in breast cancer therapy. However, challenges such as aggregation and inability to produce sub-10 nm SPIONs limit their potential in magnetothermal ablation. We report a facile, efficient, and robust in situ method for the synthesis of SPIONs within a poly(ethylene glycol) (PEG) reactor adsorbed onto reduced graphene oxide nanosheets (rGO) via the microwave hydrothermal route. This promising modality yields crystalline, stable, biocompatible, and superparamagnetic PEGylated SPION-rGO nanocomposites (NCs) with uniform dispersibility. Our findings show that rGO acts as a breeding ground for the spatially distributed nanosites around which the ferrihydrite seeds accumulate to ultimately transform into immobilized SPIONs. PEG, in parallel, acts as a critical confining agent physically trapping the accumulated seeds to prevent their aggregation and create multiple domains on rGO for the synthesis of quantum-sized SPIONs (9 ± 1 nm in diameter). This dual functionality (rGO and PEG) exhibits a pronounced effect on reducing both the aggregation and the sizes of fabricated SPIONs as confirmed by the scanning transmission electron microscopy images, dynamic light scattering analyses, and the specific absorption rates (SARs). Reduced aggregation lowered the toxicity of NCs, where PEGylated SPION-rGO NCs are more biocompatible than PEGylated SPIONs, showing no significant induction of cell apoptosis, mitochondrial membrane injury, or oxidative stress. Significantly less lactate dehydrogenase release and hence less necrosis are observed after 48 h exposure to high doses of PEGylated SPION-rGO NCs compared with PEGylated SPIONs. NCs induce local heat generation with a SAR value of 1760 ± 97 W/g, reaching up to 43 ± 0.3 °C and causing significant MCF-7 breast tumor cell ablation of about 78 ± 10% upon applying an external magnetic field. Collectively, rGO and PEG functionalities have a synergistic effect on improving the synthesis, stability, biocompatibility, and magnetothermal properties of SPIONs.