The novelty of this work is the conjugation of poly(ethylene) oxide (PEO) with the erbium oxide (Er2O3) nanoparticles using the electrospinning technique. In this work, synthesised PEO-coated Er2O3 nanofibres were characterised and evaluated for their cytotoxicity to assess their potential use as diagnostic nanofibres for magnetic resonance imaging (MRI). PEO has significantly impacted nanoparticle conductivity due to its lower ionic conductivity at room temperature. The findings showed that the surface roughness was improved over the nanofiller loading, implying an improvement in cell attachment. The release profile performed for drug-controlling purposes has demonstrated a stable release after 30 min. Cellular response in MCF-7 cells showed high biocompatibility of the synthesised nanofibres. The cytotoxicity assay results showed that the diagnostic nanofibres had excellent biocompatibility, indicating the feasibility for diagnosis purposes. With excellent contrast performance, the PEO-coated Er2O3 nanofibres developed novel T2 and T1-T2 dual-mode MRI diagnostic nanofibres leading to better cancer diagnosis. In conclusion, this work has demonstrated that the conjugation of PEO-coated Er2O3 nanofibres improved the surface modification of the Er2O3 nanoparticles as a potential diagnostic agent. Using PEO in this study as a carrier or polymer matrix significantly influenced the biocompatibility and internalisation efficiency of the Er2O3 nanoparticles without triggering any morphological changes after treatment. This work has suggested permissible concentrations of PEO-coated Er2O3 nanofibres for diagnostic uses.