Ion-beam mixing of the thermally immiscible Fe/Ag system is studied by 90 keV Ar ϩ -ion irradiation of Fe/Ag multilayer at 325 K and the evolution of microstructure is studied by x-ray diffraction ͑XRD͒, x-ray reflectivity, and transmission electron microscopy ͑TEM͒. XRD measurements did not show any evidence of a additional phase formation or increase in solubility due to mixing of Fe in Ag. X-ray reflectivity analysis shows an initial sharpening at the interface for a fluence of 1ϫ10 16 ions/cm 2 and the destruction of multilayer periodicity is observed for higher fluences. The microstructural studies by TEM show a reduction in Ag particle size with fluence. The size of Ag nanoclusters was optimum at a fluence of 7ϫ10 16 ions/cm 2 and was found to be in the range of 10-20 nm. The particle density decreases at low fluence and on further irradiation, the particle density increases at higher ion fluences. This indicates the nucleation of Ag particles presumably due to long-range transport of Ag atoms. These Ag atom clusters give rise to a granular microstructure.