The potential energy surface of the Fe dimer is investigated on the basis of density functional theory in the generalized gradient approximation (GGA). Electron correlation effects are taken into account explicitly within the GGA+U approach. We find a value of 2.20 eV for the Coulomb repulsion parameter U to describe the Fe dimer best, yielding a 9 Sigma(g)- ground state with an interatomic separation of 2.143 A. Agreement of the associated vibrational frequency, binding energy, ionization potential, and electron affinity with experimental data as well as corresponding results calculated within a high-level ab initio approach is improved significantly compared to conventional GGA. The effect of U on calculated geometric and magnetic properties of larger Fe clusters is discussed.