Novel nano-composite powders composed of hard-magnetic Mn54Al46 and soft-magnetic α-Fe were prepared by high-energy ball milling. The effect of α-Fe and preparation conditions on the structure and magnetic properties of the composite powders has been investigated. The ε-MnAl transforms to γ-MnAl, τ-MnAl, and β-phase under ball milling and annealing. The saturation magnetization and coercivity of the two-phase samples decrease with increasing temperature for the τ-phase decomposes at elevated temperatures. With increasing iron content, the coercivity decrease first and then increase up to 0.33 T when the Fe content is 10 wt%. Further addition of the magnetically soft iron phase would result in a decrease of the coercivity.