High energy ball milling is a promising materials processing technique that is widely used to produce nanocrystalline structures. However, when stainless steel or hardened steel containers and balls are used for milling, contamination from the milling medium can influence the material properties of the final nanostructured products due to intercalation of iron (Fe) as an impurity. This study reports the effect of iron contamination on nanocrystalline aluminum (Al) powder. 57Fe Mossbauer spectroscopy and bulk magnetization studies using a vibrating sample magnetometer show that pure Al powder milled in hard steel media is strongly ferromagnetic at room temperature due to Fe contamination of about 5 at.% from the milling medium. TEM studies indicate that the system consists mainly of nano-sized Fe interspersed in Al with average crystallite sizes of ~2 and ~5 nm for Fe and Al, respectively. A comparative study of this system made with a mechanically alloyed Fe–Al system with the same percentage of Fe mixed with pure Al and mechanically alloyed using tungsten carbide vials and balls shows that the saturation magnetization, coercivity, Curie temperature, and low temperature behavior (field cooled–zero field cooled) are very different in the two cases. The different magnetic properties of the two systems can be attributed to the presence of magnetic and non-magnetic phases present.