Monoclinic-phase vanadium dioxide (VO2 (M)) has attracted much attention due to the potential for energy-efficient smart window applications, owing to its thermochromism in the infrared region induced by insulator to metal phase transition. The composite coatings fabricated by dispersing VO2 (M) nanoparticles in a polymer matrix are superior to continuous VO2 (M) coatings due to their advantages in large solar modulation ability and high luminous transmittance. Ultrafine high-quality VO2 (M) nanoparticles are desired to achieve the excellent thermochromic performance of the VO2-based composite films. In this study, we present a fast synthesis of ultrafine VO2 (M) nanoparticles by a microwave-assisted hydrothermal method. The crystal phase and morphology evolution along the synthesis process was studied in detail. Low-reaction temperature (200 °C) favored the formation of intermediate nanosheets of VO2・xH2O with a lateral size of 50–500 nm. As the temperature increased, the edges of the nanosheets were gradually consumed and grew into nanoparticles with imperfect crystallinity. At higher temperature of 300 °C, the VO2・xH2O nanosheets collapse and eventually transform into pure single VO2 (M) nanoparticles with average size ∼20 nm. The optimal duration for the synthesis of VO2 (M) nanoparticles in the microwave hydrothermal reaction at 300 °C was only 8 min. The flexible thermochromic films fabricated with the VO2 (M) nanoparticle-polymer composite coating exhibited excellent thermochromic performance with a solar modulation efficiency of 20.73% and luminous transmittance of 55.04%, the values being one of the best reported thermochromic performance of hydrothermally synthesized VO2 (M).