A detailed study of eight systematically chosen Fe:LiNb0₃ crystals is presented. Correlation between the photorefractive sensitivity and various chemical properties of Fe:LiNb0₃ is investigated in order to ascertain optimum performance of Fe:LiNb0₃ crystals in holographic storage and display applications. Concentrations of Fe²⁺ and Fe³⁺ ions have been determined from optical and EPR spectra while impurities have been detected from x-ray emission and infrared spectra. Particular emphasis is placed on investigating the dependence on Fe³⁺ ion concentrations of the photorefractive sensitivity. The photorefractive sensitivity is shown to depend primarily on the concentration of Fe²⁺ ions in Fe:LiNb0₃. This fact seems to suggest that Fe²⁺ ions are the impurity centers responsible for the photorefractive effect in Fe:LiNb0₃. Spectral dependence of the photorefractive sensitivity and its modification due to oxygen annealing are also reported. Our results indicate that an unannealed Fe:LiNb0₃ crystal containing 0.05 mole % Fe with 20-25% of the ions in the Fe²⁺ state and the remainder in the Fe³⁺ state possesses the most favorable photorefractive sensitivity.