Studying diamond graphitization is a crucial issue in ultra-precision machining because it sheds light on the reason for material removal during polishing. The polishing disc made of cast iron is usually used to process diamonds, and a high-quality surface can be obtained. However, the graphitization mechanism induced by iron (Fe) is still obscure. This paper employs the density-functional theory (DFT) method to elucidate the mechanism by which Fe induces diamond graphitization. The results demonstrated that Fe atoms at the metastable adsorption sites (P3) on the surface could change some C–C interactions between layers. Notably, multiple Fe atoms at the P3 sites could alter the region of surface graphitization and the structural dissociation direction. The surface area close to Fe atoms became stable, while the surrounding surface areas were susceptible to oblique dissociation into graphite-like structures. Moreover, we speculated that the material removal rate was related to the moving activation energy of Fe atoms. Based on the charge-transfer and microstructural evolution, the phenomenon of Fe-atom-induced diamond graphitization was attributed to varying the connections between sixfold chair rings and promoting their weakening and dissociation rather than breaking the structure of sixfold chair rings.