Abstract: Existing interatomic potentials for the iron-carbon system suffer from qualitative flaws in describing even the simplest of defects. In contrast to more accurate first-principles calculations, all previous potentials show strong bonding of carbon to overcoordinated defects (e.g., self-interstitials, dislocation cores) and a failure to accurately reproduce the energetics of carbon-vacancy complexes. Thus any results from their application in molecular dynamics to more complex environments are unreliable. The problem arises from a fundamental error in potential design—the failure to describe short-ranged covalent bonding of the carbon p electrons. We describe a resolution to the problem and present an empirical potential based on insights from density-functional theory, showing covalent-type bonding for carbon. The potential correctly describes the interaction of carbon and iron across a wide range of defect environments. It has the embedded atom method form and hence appropriate for billion atom molecular-dynamics simulations.