The influence of the grinding process on the magnetic properties of as prepared and functionalized multiwall carbon nanotubes (MWCNTs) is presented. We have observed that 3 h mechanical grinding at 400 rpm in contrast to functionalization does not remove the iron contamination from MWCNTs. However, it changes the Fe chemical states. The magnetic properties of iron nanoparticles (Fe-NPs) embedded in the carbon matrix of MWCNTs have been analyzed in detail. We have proven that single-domain non-interacting Fe_(C,O)-NPs enriched in the Fe₃C phase (~10 nm) enclosed inside these nanotubes are responsible for their magnetic properties. Mechanical grinding revealed a unique impact of -COOH groups (compared to -COONH₄ groups) on the magnetism of functionalized MWCNTs. In MWCNT-COOH ground in a steel mill, the contribution of the Fe₂O₃ and α-Fe phases increased while the content of the magnetically harder Fe₃C phase decreased. This resulted in a 2-fold coercivity (H_c) decrease and saturation magnetization (M_S) increase. A 2-fold remanence (M_r) decrease in MWCNT-COOH ground in an agate mill is related to the modified Fe_(C,O)-NP magnetization dynamics. Comparison of the magnetostatic exchange and effective anisotropy length estimated for Fe_(C,O)-NPs allows concluding that the anisotropy energy barrier is higher than the magnetostatic energy barrier. The enhanced contribution of surface anisotropy to the effective anisotropy constant and the unique effect of the -COOH groups on the magnetic properties of MWCNTs are discussed. The procedure for grinding carboxylated MWCNTs with embedded iron nanoparticles using a steel mill has a potential application for producing Fe-C nanocomposites with desired magnetic properties.