The effect of water on iron-based nanoparticles under hydrogen and syngas was investigated by in situ X-ray absorption spectroscopy. The iron oxide (γ-Fe2O3) nanoparticles, dispersed as a monolayer on flat silica surfaces, were readily converted into metallic iron in dry hydrogen at 350 °C and into iron carbide in dry syngas (H2/CO 2/1 vol/vol) at 325 °C. However, in the presence of water, the reduction did not proceed beyond magnetite (Fe3O4) up to 350 °C. Wustite (Fe(II)O or FeO(1–x)) was formed at 450 °C in wet syngas and 550 °C in wet hydrogen. Once formed, the iron carbide nanoparticles proved remarkably stable against oxidation in wet syngas at 350 °C. However, we observed the formation of a surface iron(II) oxide phase that increases with increasing H2O/CO ratio. This implies that the active surface of iron-based Fischer–Tropsch catalysts is covered by considerable amounts of adsorbed oxygen during the Fischer–Tropsch reaction. Reducing the temperature by only 20 K results in complete and irreversible oxidation to magnetite. We propose that the surface iron(II) oxide plays an important role during Fischer–Tropsch synthesis by regulating the relative rates of CO hydrogenation versus water gas shift and by stabilizing the iron carbide catalyst against irreversible deactivation by oxidation to magnetite.