To improve the hydrophobic property of iron nanoparticle (INP) coated on palygorskite (P), cationic surfactant cetyltrimethyl ammonium bromide (CTMAB) was used to modify its surface properties through ion exchange. The structure of the composited P-INP/CTMAB was characterized by various analytical methods. The results showed that the long chain of CTMAB was coated on the surface of P-INP without intercalation effect. The morphology of P-INP was thus not obviously changed after the modification, but the special specific surface area increased from 30.63m2g−1 to 127.04m2g−1. The decoloration and degradation efficiency of P-INP/CTMAB towards acid orange 7 (AO7) was examined under different pH value, temperature and dosage conditions. The results showed that the reaction was preferred to the acidic environment and its first-order reaction rate constant (kobs) linearly depended on the dosage. With suitable conditions, the removal rate of AO7 and total organic carbon (TOC) by P-INP/CTMAB reached about 98.4% and 59.21% after 2h, respectively. These values were both higher than that of the unmodified composition P-INP, suggesting the synergistic effects in surface adsorption and the following removal reaction. The degradation intermediate products were investigated using HPLC-MS, and the potential degradation pathway of AO7 by P-INP/CTMAB was determined.