Nanoscale zero-valent iron (nFe0) tends to aggregate, which dramatically affects its aqueous characteristics and thereby its potential in water treatment applications. Hence, the main aim of this study is to overcome such drawback of nFe0 by a new modification approach. Iron nanoparticles were modified by magnesium hydroxide (Mg(OH)2) addition with different mass ratios in order to form a nanocomposite with superior aqueous characteristics. The optimization process of the iron–magnesium nanocomposite (nFe0-Mg) was conducted through different approaches including settlement tests, morphology and crystallinity investigations and particle size estimation. The addition of Mg(OH)2 to nFe0 with a Mg/Fe coating ratio of 100% resulted in stimulated stability of the particles in aqueous suspension with around 95% enhancement in the suspension efficiency compared to that of nFe0. Results showed that the average particle size and degree of crystallinity of nFe0-Mg(Mg/Fe:100%) decreased by 46.7% and increased by 16.8%, respectively, comparing with that of nFe0. Additionally, the iron core of the synthesized nFe0 was adequately protected from aqueous corrosion with lower iron oxides leachates after the optimal modification with Mg(OH)2. Furthermore, Mg(OH)2 coating resulted in a stimulated adsorption reactivity of the composite towards phosphorus (P) with around 3.13% promotion in the removal efficiency comparing to that of nFe0.