Following our previous findings that confinement within carbon nanotubes (CNTs) can modify the redox properties of encapsulated iron oxides, we demonstrate here how this can affect the catalytic reactivity of iron catalysts in Fischer-Tropsch synthesis (FTS). The investigation, using in situ XRD under conditions close to the reaction conditions, reveals that the distribution of iron carbide and oxide phases is modulated in the CNT-confined system. The iron species encapsulated inside CNTs prefer to exist in a more reduced state, tending to form more iron carbides under the reaction conditions, which have been recognized to be essential to obtain high FTS activity. The relative ratio of the integral XRD peaks of iron carbide (Fe(x)C(y)) to oxide (FeO) is about 4.7 for the encapsulated iron catalyst in comparison to 2.4 for the iron catalyst dispersed on the outer walls of CNTs under the same conditions. This causes a remarkable modification of the catalytic performance. The yield of C5+ hydrocarbons over the encapsulated iron catalyst is twice that over iron catalyst outside CNTs and more than 6 times that over activated-carbon-supported iron catalyst. The catalytic activity enhancement is attributed to the effect of confinement of the iron catalyst within the CNT channels. As demonstrated by temperature-programmed reduction in H2 and in CO atmospheres, the reducibility of the iron species is significantly improved when they are confined. The ability to modify the redox properties via confinement in CNTs is expected to be of significance for many catalytic reactions, which are highly dependent on the redox state of the active components. Furthermore, diffusion and aggregation of the iron species through the reduction and reaction have been observed, but these are retarded inside CNTs due to the spatial restriction of the channels.