We present a study of the changes in the magnetic and electronic properties of small, deposited Fe clusters upon exposure to the graphite surface. The clusters exhibit strong X-ray magnetic circular dichroism (XMCD) at the L-3 edge while matrix isolated in a thin Ar film. XMCD and photoemission experiments show that the clusters are driven into a nonmagnetic state by the interaction to graphite. Our results support earlier calculations for adatoms and dimers and extend their validity to larger cluster sizes. They also provide a basis for an understanding of the magnetic properties of carbon encapsulated transition metal particles. (C) 2004 Elsevier B.V. All rights reserved.