PbS-coated CdS nanocomposite particles were synthesized by an ion displacement method in an inverse microemulsion. Their growth kinetics were studied with UV–vis spectroscopy. Transmission electron microscopic characterization shows that PbS-coated CdS particles are uniform in size with a mean diameter of 6 nm. The electron diffraction patterns demonstrate their crystalline nature. Third-order nonlinear optical properties in the samples were investigated using the Z-scan technique with femtosecond laser pulses at 780-nm wavelength. The nonlinear refractive index of PbS-coated CdS nanocomposite particles in microemulsion varied with the molar ratio of Cd/Pb ions and reached a maximum of 5.3 × 10−12 cm2/GW for the sample with a Cd/Pb ion ratio of 1 to 2. The observed large refractive nonlinearity in these nanocomposite particles may be attributed to the optical Stark effect and strong interfacial and inter-nanoparticle interactions.