PURPOSE: To obtain alloy steel powder which contains oxygen at a lower ratio and has excellent moldability by reducing roughly iron oxide, pulverizing the same, mixing a desired amt. of water-sprayed base alloy powder consisting of a prescribed compsn. therewith and subjecting the mixture to finish reduction.

CONSTITUTION: The iron oxide such as iron ore or mill scale is roughly reduced and ground. The water-sprayed base alloy powder which is preliminarily made to an alloy steel is mixed with the powder at such a rate at which the desired compsn. is obtd. after the finish reduction. The powder mixture is subjected to the finish reduction. The alloy steel powder for powder metallurgy consisting of ≤0.10wt% C, ≤2.0% Mn, ≤0.30% oxygen content and further ≥1 kinds among 0.10W5.0% Cr, 0.10W5.0% Ni, ≤2.0% Si, 0.10W10.0% Cu, 0.01W3.0% Mo, 0.01W3.0% W, 0.01W2.0% V, 0.005W0.50% Ti, 0.005W0.50% Zr, 0.005W0.50% Nb, 0.03W1.0% P and 0.0005W1.0% B or further ≥1.0% S and the balance substantially Fe is thus obtd. The steel powder has the excellent machineability when made into a sintered body.