Transient response method, temperature-programmed desorption (TPD), and a temporary analysis of products (TAP) reactor were used to study an inhibiting effect of water vapor in N2O decomposition to N-2 and O-2 over Fe-ZSM-5 catalysts with low iron content. The zeolites were activated in He at 1323 K for dehydroxylation and formation of active Fe(II) sites. At temperatures lower than 673 K the adsorbed water affects three main reaction steps involved in N2O decomposition, namely, N2O reversible adsorption, atomic oxygen (O)(Fe) loading from N2O, and oxygen desorption. The amounts of reversibly adsorbed N2O and (O)(Fe) loaded from N2O considerably decreased when water was preadsorbed on the zeolite. The oxygen recombination/desorption is the rate-determining step of N2O decomposition. During the TPD runs, oxygen desorption from the water-saturated catalyst as compared to the dry one took place at similar to 300 K higher temperature. For the first time it was shown that water adsorption on the catalyst loaded with (O)(Fe) at 523 K induces the concomitant desorption of molecular oxygen. Moreover, the (O)(Fe) loaded on wet zeolite was shown to be inactive in CO oxidation, indicating transformation of active Fe(II) sites in the presence of N2O and H2O into an inactive Fe(III) hydroxylated form.