A class of multifunctional hybrid nanoparticles (NPs) that can integrate a magnetic core, silver (Ag) nanocrystals, and a biocompatible poly(ethylene glycol) (PEG) shell were synthesized and characterized and their applications as antibacterial agents, optical labels for cellular imaging and drug carriers were tested. The synthetic strategy involves a one-step solvothermal synthesis of Fe₃O₄@PEG template NPs (∼60 nm) with magnetic Fe₃O₄ nanocrystals in the core and porous PEG as the shell, followed by loading and in situ reduction of Ag⁺ ions to form Ag nanocrystals in the shell. The size and number of the Ag nanocrystals embedded in the PEG shell can be readily controlled via a simple reaction condition change, resulting in different nanostructures and properties of the hybrid NPs. Such designed Fe₃O₄@Ag–PEG hybrid NPs can combine the properties and functions from each component. While the Fe₃O₄ core provides an easy magnetic separation and targeting and magnetic resonance imaging (MRI) contrast ability, the Ag nanocrystals provide stable strong fluorescence and antibacterial activity. The porous PEG shell with excellent stability in water and non-cytotoxicity can be used as a drug carrier for combined photothermo/chemo-therapy. The small hybrid NPs can enter the intracellular region and light up the mouse melanoma B16F10 cells. This class of hybrid NPs with rational integration of functional building blocks should offer broad opportunities for external magnetic manipulation, imaging diagnostics, antibacterial applications and as drug carriers.