In this study, a FeCl3-assisted hydrothermal treatment (HTT) process under mild conditions (90 °C–130 °C) was developed for deep dewatering of anaerobically digested sludge. HTT of sludge at 90 °C–130 °C with 4%–6% Fe3+ ions loading based on total sludge solids followed by mechanical dewatering reduced sludge water content from 82% to 38%–53% and sludge weight by 62%–72%. The treatment increased the flowability of sludge through reduction of apparent viscosity and disintegration of colloidal forces between sludge particles. This study unveiled that FeCl3-assisted HTT process had three mechanisms for improving sludge dewaterability and flowability. The treatment hydrolysed sludge flocs in the presence of Lewis acid FeCl3 and high temperature (90–130 °C). Fe3+ ions also improved dewaterability through the formation of double electric layers and neutralisation of surface negative charges, leading to flocculation of sludge flocs. More importantly, the hydrolysed sludge components produced during HTT process acted as reducing agents and led to in-situ generation of iron oxyhydroxide nanoparticles through reduction-oxidation reactions, further enhancing flocculation/co-precipitation of sludge flocs. The treatment reduced EPS content and changed conformational structures of EPS proteins by breaking down hydrogen bond-maintaining α-helix which led to a loose EPS protein structure and enhanced hydrophobicity and flocculability. Furthermore, the FeCl3-assisted treatment promoted immobilisation of the majority of heavy metals in the sludge matrix through co-precipitation/complexation reactions with iron species and organic/inorganic matters. This indicates that the FeCl3-assisted treatment reduced direct toxicity/bioavailability of the majority of heavy metals and the treated sludge may be suitable for land application. Overall, this study provides new insights into mechanism of FeCl3-assisted HTT process for dewaterability of anaerobically digested sludge and immobilisation of heavy metals.