The mechanochemical covalent functionalization of carbon-encapsulated iron nanoparticles (CEINs) is reported. Unprotected sugars (mannose, galactose, β-cyclodextrin) and amino sugars (glucosamine and chitosan) were successfully conjugated to the surface of CEINs. The developed grinding-induced methods employ (i) the 1,3-dipolar cycloadditions of nitrile oxides or azomethine ylides and (ii) amidation-type reactions with the inclusion of carboxyl-functionalized CEINs and amino sugars. All the developed mechanochemical processes are fast (reaction time 10 min) and result in high degrees of coverage (7.3-31.5 wt%). The presented functionalization routes also constitute easy to perform and environmentally improved protocols. Moreover, the use of toxic organic solvents is not required. A comprehensive study on the colloidal stability of the sugar-functionalized CEINs is also included in this work. The results of the turbidimetric analyses reveal that both grinding-induced formation of amide bonds and the cycloadditions of sugar moieties to the surface of CEINs result in the significant improvement of their colloidal stability. The highest stability of the aqueous dispersion was found for CEINs functionalized with β-cyclodextrin. The comparative studies between the classical wet approach and the grinding-induced functionalization of CEINs show that the herein developed environmentally improved method increases the colloidal stability three times. The crucial role of the mechanochemical approach in the covalent functionalization of CEINs and the improvement of their colloidal stability is discussed in this work.