A novel method is developed to fabricate an Al2O3/Fe-Al composite coating on 1045 steel with excellent mechanical properties and wear resistance. Proper thermal treatment of the ball-milling Fe-Al powder is essential to achieve in-situ assembled Al2O3 nanoparticles, which plays a pivotal role in the mechanical properties of the coating obtained by a subsequent laser cladding process. Systematic studies show that the in-situ grown Al2O3 nanoparticles with a diameter of 50–100 nm assembling on the Fe-Al powder is fabricated by thermal treating the ball-milling Fe-Al powder at 850 °C for 2 h under 0.1 Pa vacuum atmosphere. This kind of metal feedstock is important to achieve a uniform Al2O3 nanoparticles reinforced Fe3Al laser cladding coating, with minimum lattice misfit and high thermodynamic stability characteristics. The in-situ grown Al2O3 nanoparticles with proper sizes in the laser cladding coating refine the solidified microstructure and inhibit the growth of cracks, resulting in not only the enhancement of hardness and toughness, but also a lower specific wear rate of 0.1811 × 10−3 mm3 N−1•m−1 in the dry sliding test.