The liquid-phase plasma reduction method has been applied to prepare iron nanoparticles from iron chloride solution using a bipolar pulsed electrical discharge system. The excited states of atomic iron, hydrogen, and oxygen as well as the molecular bands of hydroxyl radicals were detected in the emission spectra. The iron nanoclusters formed at the initial stage convert to dispersion of small iron nanoparticles, which then grows slowly to form anisotropic, tetragonal shape. The cationic surfactant of CTAB was shown to exhibit a large influence on the particle generation procedure.