In this study, a commonly used reducing agent, hydroxylamine (HA), was introduced into Fe(II)/PAA process to improve its oxidation capacity. The HA/Fe(II)/PAA process possessed high oxidation performance for diclofenac degradation even with trace Fe(II) dosage (i.e., 1 μM) at pH of 3.0 to 6.0. Based on electron paramagnetic resonance technology, methyl phenyl sulfoxide (PMSO)-based probe experiments and alcohol quenching experiments, FeIVO2+ and carbon-centered radicals (R-O•) were considered as the primary reactive species responsible for diclofenac elimination. HA accelerated the redox cycle of Fe(III)/Fe(II) and itself was gradually decomposed to N2, N2O, NO2− and NO3−, and the environmentally friendly gas of N2 was considered as the major decomposition product of HA. Four possible degradation pathways of diclofenac were proposed based on seven detected intermediate products. Both elevated dosages of Fe(II) and PAA promoted diclofenac removal. Cl−, HCO3− and SO42− had negligible impacts on diclofenac degradation, while humic acid exhibited an inhibitory effect. The oxidation capacity of HA/Fe(II)/PAA process in natural water matrices and its application to degrade various micropollutants were also investigated. This study proposed a promising strategy for improving the Fe(II)/PAA process and highlighted its potential application in water treatment.