The oxidative stabilization process of gel-spun carbon nanotube (CNT)/polyacrylonitrile (PAN) composite fibers have been studied and optimized. Optimum stabilization time depends on both the applied tension and temperature. Various characterization methods including thermal shrinkage, dynamic mechanical analysis, infrared spectroscopy, and wide angle X-ray diffraction are used to monitor the chemical and structural evolution during stabilization and carbonization. The relationship between the stabilization conditions of CNT/PAN composite fiber and the tensile properties of the resulting carbon fibers were investigated. By optimizing stabilization conditions, CNT/PAN based carbon fibers with a tensile strength of 4 GPa and a tensile modulus of 286 GPa were obtained using batch carbonization processing at 1100 °C.