An ab initio pseudopotential density-functional study of magnetic iron using both the standard local-spin-density approximation and a generalized gradient-expansion approximation is described. The core-valence overlap in this material is found to be important and is treated carefully in the calculation. A mixed-basis approach is employed and the results are comparable with those from all-electron calculations which made use of the same local-spin-density-functional (LSDA) formalism. Results from both all-electron and pseudopotential calculations are found to have significant differences with experimental results. To go beyond LSDA, a recently proposed gradient-expansion exchange and correlation functional is implemented. The calculated results show significantly better agreement with experiment, giving the bcc ferromagnetic phase as the stable structure.