The formation of iron silicide nanocrystals (NCs) and their embedding into monocrystalline silicon was studied. Solid phase epitaxy of 0.4 nm Fe at 630 °C resulted in formation of NCs consisted of β-FeSi2 and ϵ-FeSi phases. Annealing of NCs at 750 °C for 90 min led to transformation of β-FeSi2 and ϵ-FeSi into α-FeSi2. On the other hand, silicon layer growth over as-formed NCs, at the same temperature, resulted in formation of single phase NCs consisted of β-FeSi2. Silicon deposition rate proved to be the crucial point for a full embedding of NCs. The rate of 1 nm/min resulted in emersion of NCs to the surface during silicon overgrowth irrespective of Si cap layer thickness, while the rate of 8 nm/min led to the full embedding of β-FeSi2 NCs. Both incompletely and fully embedded β-FeSi2 NCs have epitaxial relationship and stress favorable for an indirect to direct band-gap transition at Y point.