Diphasic Al2O3-SiO2 diphasic gel was synthesized by sol-gel route from inorganic salts following aqueous phase colloidal interaction and the effect of Fe2O3 additive on the formation of mullite ceramics from this diphasic gel was investigated. The gel powder was thoroughly characterized by chemical analysis, measurement of surface area, bulk density and FTIR spectroscopy. The calcined gel were compacted with Fe2O3 additives in three different proportions (ca. 1, 2 and 3 wt) and heat treated at different elevated temperatures (ca, 1400, 1500 and 1600°C). The analyses of microstructure and phase composition of the sintered masses were carried out by scanning electron microscopy and XRD technique. The morphology of the mullite crystals changed significantly in the presence of the additives. With 3 additive at a sintering temperature of 1600°C the apparent porosity almost became zero and the maximum improvement in density in the sintered compacts was about 22. The flexural strength and fracture toughness of the sintered compacts also improved by 15 and 4 respectively in the presence of the Fe2O3 additive under the experimental condition.