For reliable and efficient inclusion of electron-electron correlation effects in nanosystems we formulate a combined density functional theory/nonhomogeneous dynamical mean-field theory (DFT+DMFT) approach which employs an approximate iterated perturbation theory impurity solver. We further apply the method to examine the size-dependent magnetic properties of iron nanoparticles containing 11-100 atoms. We show that for the majority of clusters the DFT+DMFT solution is in very good agreement with experimental data, much better compared to the DFT and DFT+U results. In particular, it reproduces the oscillations in magnetic moment with size as observed experimentally. We thus demonstrate that the DFT+DMFT approach can be used for accurate and realistic description of nanosystems containing about hundred atoms.