Modern water-atomized steel powder grades are characterised by presence of two types of surface oxides: thin iron oxide layer, covering more than 90% of the powder surface and more thermodynamically stable particulate oxide. Development of inter-particle necks as well as carbon dissolution in the iron matrix requires efficient removal of the iron oxide layer. Hence, carbon reactivity strongly affects efficiency of the surface oxide reduction that determines inter-particle necks development and carbon dissolution and so microstructure development. The present study is focused on the analysis of the effect of three different carbon sources synthetic graphite, natural graphite and carbon black on the microstructure and inter-particle necks development in Cr-alloyed PM steels. Metallographic and fractographic studies indicate that the most significant property of the carbon sources affecting carbon reactivity is the carbon powder size. Carbon black indicates highest reactivity at elevated temperatures but is fully inert at the temperatures below 900°C.