This study used the life cycle assessment (LCA) methodology (ISO 14040, ISO 14044) to quantify and compare the environmental impacts associated with the production of masonry mortar manufactured with different amounts of natural fine aggregate (NFA), recycled fine aggregate (RFA) from construction and demolition waste (C&DW), and admixture. The study also analyzed and compared the production processes for fine aggregates (natural and recycled) in order to determine the associated benefit of using RFA from C&DW instead of NFA. The system boundaries were considered from cradle to gate level and included the production of raw materials, transport to the mortar plant, and the manufacture of 1 t functional unit of dry masonry mortar. Foreground data were site specific and collected by means of surveys, interviews, and technical visits to the local producers (Spain). Inventory data were loaded into the SimaPro software and processed using the CML-IA and ILCD methods. Uncertainty analysis was conducted using the Monte Carlo method to verify the uncertainty related to the data variability for both foreground and background inventory data. Also, a series of sensitivity analyses were performed to determine how changes in the transport distances of C&DW and the type of truck would alter the results of the LCA. The results showed that using RFA helped diminish environmental burdens in almost all the impact categories due to the avoidance of impacts arising from the transport and disposal of C&DW in landfills. The impacts increased slightly in ecotoxicity due to the fact that the transport distance of RFA was greater than the transport distance of NFA. The uncertainty analysis suggested a high level of accuracy for the majority of the impact categories. Furthermore, the sensitivity analysis determined how distances and transport processes influenced the environmental impact of masonry mortars so that the greater the transport distance of C&DW from site of generation to treatment plant and the smaller the transport distance to landfill, the greater the environmental burdens. This study has clearly shown the environmental benefits which arise from using RFA from C&DW as secondary raw material for the production of masonry mortar, thereby contributing to the circular economy. Nevertheless, in order to be able to quantify the environmental benefit generated by the recycling of C&DW, it is extremely important that the processes avoided, such as the transport and disposal of C&DW in landfill, are taken into account in life cycle assessment studies.