Thin-film magnetic sensor and memory devices in future generations may benefit from a processing tool for final-step etching and smoothing of surfaces to nearly an atomic scale. Gas-cluster ion-beam (GCIB) systems make possible improved surface sputtering and processing for many types of materials. We propose application of GCIB processing as a key smoothing step in thin-film magnetic-materials technology, especially spin-valve GMR. Results of argon GCIB etching and smoothing of surfaces of alumina, silicon, permalloy and tantalum films are reported. No accumulating roughness or damage is observed. The distinct scratches and tracks seen in atomic-force microscopy of CMP-processed surfaces, are removed almost entirely by subsequent GCIB processing. The technique primarily reduces high spatial-frequency roughness and renders the topographic surface elevations more nearly gaussian (randomly distributed).