Anaerobic oxidation of methane (AOM) was shown to reduce methane emissions by over 50% in freshwater systems, its main natural contributor to the atmosphere. In these environments iron oxides can become main agents for AOM, but the underlying mechanism for this process has remained enigmatic. By conducting anoxic slurry incubations with lake sediments amended with 13C-labeled methane and naturally abundant iron oxides the process was evidenced by significant 13C-enrichment of the dissolved inorganic carbon pool and most pronounced when poorly reactive iron minerals such as magnetite and hematite were applied. Methane incorporation into biomass was apparent by strong uptake of 13C into fatty acids indicative of methanotrophic bacteria, associated with increasing copy numbers of the functional methane monooxygenase pmoA gene. Archaea were not directly involved in full methane oxidation, but their crucial participation, likely being mediators in electron transfer, was indicated by specific inhibition of their activity that fully stopped iron-coupled AOM. By contrast, inhibition of sulfur cycling increased 13C-methane turnover, pointing to sulfur species involvement in a competing process. Our findings suggest that the mechanism of iron-coupled AOM is accomplished by a complex microbe-mineral reaction network, being likely representative of many similar but hidden interactions sustaining life under highly reducing low energy conditions.