Magnetic drug delivery system is one of the most important strategies for cancer diagnosis and treatment. In this study, a novel theranostic system was fabricated based on cyclodextrin nanosponge (CDNS) polymer anchored on the surface of Magnetite nanoparticles (FeO/CDNS NPs) which was then decorated with folic acid (FA) as a targeting agent (FeO/CDNS-FA). Curcumin (CUR), a hydrophobic model drug, was next loaded into the cyclodextrin cavity and polymeric matrix of CDNS (FeO/CDNS-FA@CUR). The system was fully characterized. The in vitro release study revealed pH-sensitive behavior. Cytotoxicity assays indicated a negligible toxicity for CUR free FeO/CDNS-FA NPs against both of M109 cancerous cells and MCF 10A normal cells. CUR-loaded FeO/CDNS-FA NPs exhibited higher toxicity against M109 cancerous cells than MCF 10A normal cells (p < 0.05). FeO/CDNS-FA@CUR NPs resulted in much more cell viability on normal cells than pure CUR (p < 0.05). Moreover, blood compatibility study showed minor hemolytic activity. In vitro MRI studies illustrated negative signal increase in cells affirming acceptable diagnostic ability of the nanocarrier. The T MR signal intensity for FeO/CDNS-FA@CUR NPs in M109 cells was around 2-fold higher than that of MCF 10A cells. This implies two times higher selective cellular uptake of the FeO/CDNS-FA@CUR NPs into M109 cell compared to MCF 10A. The multifunctional nanocarrier could be considered as promising candidate for cancer theranostics because of the smart drug release, selective cytotoxicity, suitable hemocompatibility, and proper T MRI contrast efficiency.