The structural and magnetic properties of iron clusters resulting from the evaporation of five monolayers of iron on a polished MgO͑001͒ substrate are examined by grazing-incidence small-angle x-ray scattering, and conversion electron Mössbauer spectroscopy. Volmer-Webergrowth is observed for room-temperature deposition, giving rise to spherical, superparamagnetic islands. Subsequent annealing causes coarsening and the particles become hemispherical. In the early stages of annealing cluster diffusion takes place, whereas later, Ostwald ripening is the dominant coarsening mechanism. The diffusion coefficient is independent from the crystallographic directions in the MgO͑001͒ surface as it is proven by the isotropic island distribution and shape. The superparamagnetic state of the particles is conserved during the whole annealing process. For ultrathin iron layers we show that, in contrast to bulk iron, the Curie temperature lies well below room temperature.