The inventories and Fe isotope composition of aqueous Fe(II) and solid-phase Fe compounds were quantified in neutral-pH, chemically precipitated sediments downstream of the Iron Mountain acid mine drainage site in northern California, USA. The sediments contain high concentrations of amorphous Fe(III) oxyhydroxides [Fe(III)am] that allow dissimilatory iron reduction (DIR) to predominate over Fe–S interactions in Fe redox transformation, as indicated by the very low abundance of Cr(II)-extractable reduced inorganic sulfur compared with dilute HCl-extractable Fe. δ56Fe values for bulk HCl- and HF-extractable Fe were ≈ 0. These near-zero bulk δ56Fe values, together with the very low abundance of dissolved Fe in the overlying water column, suggest that the pyrite Fe source had near-zero δ56Fe values, and that complete oxidation of Fe(II) took place prior to deposition of the Fe(III) oxide-rich sediment. Sediment core analyses and incubation experiments demonstrated the production of millimolar quantities of isotopically light (δ56Fe ≈ -1.5 to -0.5) aqueous Fe(II) coupled to partial reduction of Fe(III)am by DIR. Trends in the Fe isotope composition of solid-associated Fe(II) and residual Fe(III)am are consistent with experiments with synthetic Fe(III) oxides, and collectively suggest an equilibrium Fe isotope fractionation between aqueous Fe(II) and Fe(III)am of approximately -2. These Fe(III) oxide-rich sediments provide a model for early diagenetic processes that are likely to have taken place in Archean and Paleoproterozoic marine sediments that served as precursors for banded iron formations. Our results suggest pathways whereby DIR could have led to the formation of large quantities of low-δ56Fe minerals during BIF genesis.