The paper examines the influence of carbon coating on iron nanopowder used as a sintering aid for water-atomized iron powder. Iron nanopowder without such a coating was used as a reference sintering aid to isolate the influence of the carbon coating. Both nanopowder variants were characterised using XPS and HRTEM. The results showed a core–shell structure for both variants. The iron nanopowder is covered by a 3–4 nm thick iron oxide layer, while the carbon-coated iron nanopowder is encapsulated with several nanometric carbon layers. Thermogravimetry conducted in a pure hydrogen environment shows a multipeak behaviour for the carbon-coated iron nanopowder, while a single peak behaviour is observed for the iron nanopowder. Two types of micro/nanobimodal powders were obtained by mixing the nanopowder with water-atomized iron powder. Improved linear shrinkage was observed during sintering when the carbon-coated iron nanopowder was added. This can be explained by the reduction in surface diffusion in the nanopowder caused by the carbon coating, which allows the nanopowder to sinter at higher temperatures and improves densification. Carbon and oxygen analysis, density measurements, optical microscopy and JMatPro calculations were also performed.