。
She was holding something small and round in her hand.
Literal
She [topic-は] hand [in-に] small round thing [object-を] was-holding.
手に~を持っている (to hold something in one's hand) uses に for the location and を for the held object. 小さな丸いもの (small round thing) stacks two modifiers before もの (thing): the pre-nominal 小さな and the い-adjective 丸い. The past progressive 持っていた describes the state at a particular time in the past.