The tremendous reservoir of soil organic carbon (SOC) in wetlands is being threatened by water-table decline (WTD) globally. However, the SOC response to WTD remains highly uncertain. Here we examine the under-investigated role of iron (Fe) in mediating soil enzyme activity and lignin stabilization in a mesocosm WTD experiment in an alpine wetland. In contrast to the classic ‘enzyme latch’ theory, phenol oxidative activity is mainly controlled by ferrous iron [Fe(II)] and declines with WTD, leading to an accumulation of dissolvable aromatics and a reduced activity of hydrolytic enzyme. Furthermore, using dithionite to remove Fe oxides, we observe a significant increase of Fe-protected lignin phenols in the air-exposed soils. Fe oxidation hence acts as an ‘iron gate’ against the ‘enzyme latch’ in regulating wetland SOC dynamics under oxygen exposure. This newly recognized mechanism may be key to predicting wetland soil carbon storage with intensified WTD in a changing climate.