AlN:Fe polycrystalline powders were synthesized by a modified solid state reaction (MSSR) method. Powder X-ray diffraction and transmission electron microscopy results reveal the single phase nature of the doped samples. In the doped AlN samples, Fe is in Fe2+ state. Room temperature ferromagnetic behavior is observed in AlN:Fe samples. Two photoluminescence peaks located at about 592 nm (2.09 eV) and 598 nm (2.07 eV) are observed in AlN:Fe samples. Our results suggest that AlN:Fe is a potential material for applications in spintronics and high power laser devices.