A direct current (DC) arc discharge is a widely used method for large-scale production of metal nanoparticles, core–shell particles, and carbon nanotubes. Here, the growth of iron nanoparticles is explored in a modified DC arc discharge. Iron particles are produced by the evaporation of an anode, made from low-carbon steel. Methane admixture into argon gas serves as a carbon source. Electron microscopy and elemental analysis suggest that methane and/or products of its decomposition adhere to iron clusters forming a carbon shell, which inhibits iron particle growth until its full encapsulation, at which point the iron core growth is ceased. Experimental observations are explained using an aerosol growth model. The results demonstrate the path to manipulate metal particle size in a hydrocarbon arc environment.