Conventional ferrous powder metallurgy relies on uniaxial die-pressing of powder before sintering. The operation causes particle rearrangement and deformation and the initial state of the compact ultimately determines the sintering behaviour. In this study, sintering was investigated for water-atomised iron powder compacted at three different pressure levels, with and without admixed graphite. Electron back-scatter diffraction of the powder and compacts showed a large increase in low-angle grain boundaries after compaction. The sintering of the compacts was investigated by means of dilatometry in hydrogen. The initial compaction strongly influences sintering shrinkage, particularly in the low-temperature, high-diffusivity ferrite region which can account for up to 80% of the recorded shrinkage. Only a small fraction of the total shrinkage originates from the austenite phase, even at high sintering temperatures. However, the ratio of sintering shrinkage in ferrite and austenite changes with compaction pressure, carbon content and heating rate.