In this work an unexplored method of utilization of gaseous nitriding of Fe-2.3 wt% Al alloy powders was employed to realize a dispersion of nanosized AlN particles in the ferritic matrix. The nitriding treatment was carried out at 580 degrees C in ammonia atmosphere and the resulting microstructures were characterized by employing light microscopy, scanning electron microscopy, energy dispersive spectroscopy, X-ray diffraction and hardness measurements. Nitriding treatment led to the transformation of entire powder particles to iron nitrides (gamma'-Fe4N1-x and epsilon-Fe3Ni1+y) and the surfaces of the partides had a layer of iron-oxides which developed during cooling after nitriding. AI originating from iron-oxide regions partitioned to the iron-oxide/iron-nitride interface and formed an Al-oxide layer. A following hydrogen reduction treatment of the nitrided powders at 600 degrees C reduced the nitrides and surface oxides of iron to ferrite, leaving Al-oxides and Al-nitrides within the ferrite matrix. A significant increase in hardness after nitriding suggests that this process constitutes a promising new route of producing nitride-dispersion-strengthened steels. (C) 2020 Elsevier B.V. All rights reserved.