Among the abiotic stresses, water stress is a key factor that limits agricultural productivity worldwide by reducing crop yield through numerous biochemical and physiological disruptions. The use of nanomaterials in commercially available products is rapidly expanding, with significant applications in agriculture and phytoremediation. Current advancements in nanotechnology have introduced iron nanoparticles (Fe-NPs) as a promising approach to enhance crop resilience against stress conditions. Iron (Fe) plays a critical role in photosynthesis, enzyme activation, chlorophyll synthesis, and oxidative stress management, which are pivotal to plant response against water stress. Due to high surface area, small size, and controlled reactivity, Fe-NPs exhibit exceptional advantages over traditional Fe sources, viz., improved bioavailability and nutrient uptake. The current review explores Fe-NP's potential to mitigate the adverse effects of water stress in crop plants by activating various beneficial mechanisms, including improvement in antioxidant defence, osmotic adjustment, and modulating stress related to phytohormones. Particularly, Fe-NPs improve water use efficiency (WUE) and root development, facilitating water and nutrient uptake under stress conditions. Moreover, Fe-NPs assist in antioxidant enzyme regulation, which reduces the accumulation of reactive oxygen species (ROS), thereby reducing oxidative damage and sustaining the metabolic activities of plants under limited water availability. However, FeNP use in agriculture poses potential health and environmental risks, including water and soil contamination, soil microbial alteration, and residues in edible crop plants, which require careful consideration. Furthermore, Fe-NP effectiveness may vary depending on factors, viz., size of nanoparticles (NPs), concentration, method of application, and crop type. The paper concludes by discussing potential research avenues, highlighting the necessity of sustainable application methods, optimal Fe-NP formulations, and thorough environmental effect evaluations. Fe-NPs are a promising element in creating next-generation, nano-enabled farming techniques meant to increase crop resistance to water stress, which could ultimately improve food security in the face of a changing climate.