An impregnation method to prepare an active iron-based catalyst for direct coal liquefaction was improved. With the same catalytic activity, the water usage in the improved,method is only 1% of that used in the unmodified method. The improved method not only simplifies the impregnation procedure and reduces cost, but also generates small catalyst particle size on coal surface. Water in the coal promotes thermal liquefaction, but deactivates the impregnated catalyst (possibly due to the adsorption of H2O molecular on the catalyst surface). Electron probe microanalysis (EPMA), X-ray diffraction (XRD) and extended X-ray absorption fine structure spectroscopy (EXAFS) analyses show that the catalyst precursors prepared by both methods are in nanometer size and highly dispersed on coal surface. The irons deposited on coal surface are not only in sulfide forms, but also coordinate with oxygen from moisture- and oxygen-containing groups of coal. The impregnated iron may be composed of FeOOH and FeS or in the forms of Fe-O-S or Fe-S-O, The iron transforms to crystalline pyrrhotite in coal liquefaction.