The 50,000 year old, 1.8 km diameter Lonar crater is one of only two known terrestrial craters to be emplaced in basaltic target rock (the 65 million year old Deccan Traps). The composition of the Lonar basalts is similar to martian basaltic meteorites, which establishes Lonar as an excellent analogue for similarly sized craters on the surface of Mars. Samples from cores drilled into the Lonar crater floor show that there are basaltic impact breccias that have been altered by post‐impact hydrothermal processes to produce an assemblage of secondary alteration minerals. Microprobe data and X‐ray diffraction analyses show that the alteration mineral assemblage consists primarily of saponite, with minor celadonite, and carbonate. Thermodynamic modeling and terrestrial volcanic analogues were used to demonstrate that these clay minerals formed at temperatures between 130°C and 200°C. By comparing the Lonar alteration assemblage with alteration at other terrestrial craters, we conclude that the Lonar crater represents a lower size limit for impact‐induced hydrothermal activity. Based on these results, we suggest that similarly sized craters on Mars have the potential to form hydrothermal systems, as long as liquid water was present on or near the martian surface. Furthermore, the Fe‐rich alteration minerals produced by post‐impact hydrothermal processes could contribute to the minor iron enrichment associated with the formation of the martian soil.