Measurements of Fe oxyhydroxides [reactive Fe(III)] in two shallow sediment profiles from reducing and oxic environments on the Arabian Sea margin demonstrate Fe isotope fractionation during early marine diagenesis. Reactive Fe(III) has δ56Fe values between −0.77‰ and −0.19‰. Values are lowest at the top of the sediment profile and considerably lower than bulk sediment Fe (δ56Fe ≈ 0‰). Preferential reduction and dissolution of light Fe isotopes during diagenesis leaves behind an increasingly smaller and heavier reactive Fe(III) residual. Initially, the isotopic composition of reactive Fe(III) evolves down-core according to the fractionation factor typical of microbial dissimilatory Fe reduction. Deeper in the profile, δ56Fe values remain unchanged despite further Fe reduction. Here, another process with a different fractionation factor becomes dominant, probably reduction by dissolved sulfide. The δ56Fe of the residual reactive Fe(III) suggests that ∼25% of the initially present reactive Fe(III) was reduced by microbial Fe reduction. When Fe is diagenetically recycled between reducing sediments at depth and an oxic top layer, the process, depending on recycling efficiency, may result in the accumulation of light Fe in the top layer while the complementary heavier residual is buried. Fe diffusing from the seafloor back into the ocean should reflect the low-δ56Fe diagenetic source of dissolved Fe.