The iron-based pre-alloyed powders for diamond tools were produced by water-gas atomization. The physical properties of powders prepared by different processes including conventional water atomization and water-gas water atomization were compared, accordingly powders were sintered to segments and the fracture morphology and mechanical properties of the segments were observed, compared and analyzed respectively. The results showed that the iron-based pre-alloyed powder prepared by water-gas atomization with low oxygen content, is of spherical shape and fine particle size. The fracture morphology of TZ611 sintered segments using powders produced by water-gas atomization, exhibits typical ductile fracture and intergranular fracture characteristics.The mechanical properties, such as the relative density, hardness and bending strength of the segments, are greatly improved, which leading to better bonding force between the matrix and diamond. The circular blade made of pre-alloyed powder prepared by water-gas atomization is more sharp, and the service life is 1.62 times that of the conventional water atomization powder.